Introduction
:-
The public finance domain of
Economics deals with principles/cannons of taxations. There are various models
of Taxation but in the developing economies progressive system of taxation has
been advocated which means a person having larger income should contribute more
to the public exchequer in comparison to the person having lesser income.
While dealing with the subject,
it has been envisaged that if a person has profits/income he should pay taxes
if he has profit and losses simultaneously he should pay tax on net profit
after deducting the losses and if he has resultant loss or only loss he is not
required to pay taxes. However, due to the complexity and need it has been
thought of to incorporate the provisions relating to set off and carry forward of
losses. Additional complexity has been created and the losses have been
restricted to be set off due to greediness of the legislators and tax
administrators.
The set off and carry forward
of losses can be sub divided into two broad categories:-
1. Set off of losses.
2. Carry forward and Set off of
losses.
Specific provision have been
made in the income tax act, 1961 for the set-off and carry forward of losses.
The
term "Set-off" and "Carry forward of losses" in simple
words,
"Set-off" means
adjustments of losses against the profit from another source/head of income in
the same assessment year.
If losses cannot be set-off in
the same year due to inadequacy of edible profit, then such losses are carry
forward to next assessment year for adjustment against the eligible profit of
that year.
The maximum period for which
different losses can be carried forward for set-off has been provided in the
Act.
Procedure for
setting off losses:
The
process of setting off of losses and their carry forward may be covered in the
following Steps:
Step
1.
Set-off
loss from same head of income – “Inter-source” adjustment.
Step
2.
If
the loss is still existing after Step 1, loss can be set-off from other heads of
income (subject to certain restrictions) – “Inter ‑ head” adjustments.
Step
3.
If
loss still persists after Step 1 &
Step 2, the same can be carried forward to the subsequent assessment years
– Carry forward of losses.
I am trying to re-produce the same
in tabular form herein below along with FAQ issued by income tax department and
some important case laws and respective notes.
Inter-source
and inter-head Set-off [Section 70 & 71]
Section
|
Provision
|
Exception
|
70
|
Set off of
loss from one source against income from another source under the same head
of income/
inter-
source set-off under the same head of income
Any loss in respect of one
source shall be set-off against income from other source under the same head
of income. But, there are some exception to this.
|
i) Loss from
Speculative business
|
ii) Loss from
specified business under section 35 AD
|
||
iii) Long
term capital loss
|
||
iv)
Loss from the activity of owning and maintaining race horses
|
||
v)
No loss can be set- off against casual income i.e. Income from lotteries,
cross word puzzles, betting gambling and other similar games
|
||
vi)
Loss from an exempted source cannot be set off against from a taxable source
of income.
(e.g.
Share of loss of firm, agricultural losses, cultivation expenses)
|
Section
|
Provision
|
Exception
|
71
|
Set Off of
Loss from one head against income from another/ Inter head adjustment
Loss under one head of income
can be set-off against income assessable under any other head of income.
|
i) Loss under the head
Profits and gains of business or profession" cannot be set off against
income under the head "Salaries"
|
ii) No expenses can be
claimed against casual income
|
||
iii) Loss under the head
"Capital gains" cannot be set off against income under any other
head.
|
||
iv) Speculation loss and loss
from the activity of owing and maintaining race horses cannot be set-off
against income under any other head.
|
Tabular
Summary for adjustments of loss
Incomes
|
Salary
|
House
Property
|
Non
Speculative Business
|
Speculative
Business
|
LTCG
|
STCG
|
Owning
and
maintenance
of
race
horses
|
Others
|
Loss under
the head
House
Property
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Speculative
business loss
|
No
|
No
|
No
|
Yes
|
No
|
No
|
No
|
No
|
Other
business or
professional
loss
|
No
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Long term
capital loss
|
No
|
No
|
No
|
No
|
Yes
|
No
|
No
|
No
|
Short term
capital loss
|
No
|
No
|
No
|
No
|
Yes
|
Yes
|
No
|
No
|
Loss from
owning and
maintenance
of race horses
|
No
|
No
|
No
|
No
|
No
|
No
|
Yes
|
No
|
Remarks:-
"Yes"
denotes loss can be adjusted with respective income.
"No"
denotes loss cannot be adjusted with respective income.
Carry forward
and Set-off of brought forward losses
If a loss cannot be
set off either under the same head or under the different heads because of
absence or inadequacy of the income of the same year, it may be carried forward
and set off against the income of the subsequent year.
However,
the loss so carried forward can be set-off only against same head of income,
i.e. the benefit of “inter-source’ adjustment is lost.
Section
|
Nature of
loss to be carried forward
|
Income
against which the brought forward loss can be set off in subsequent years.
|
Maximum
permissible period [from the end of the relevant assessment year] for carry
forward of losses
|
71B
|
Unabsorbed loss from house
property
|
Income from House Property
|
8
assessment years
|
72
|
Unabsorbed business loss
(non- speculative)
|
Profit and gains from
business or profession (non- speculative)
|
8
assessment years
|
73
|
Loss from speculation
business
|
Income from speculation
business
|
4
assessment years
|
73A
|
Loss from specified business
under section 35AD
|
Profit from specified
business under section 35AD
|
Indefinite
period
|
74
|
Long-term capital loss
|
Long-term capital gains
|
8
assessment years
|
74
|
Short-term capital loss
|
Short/Long-term capital gains
|
8
assessment years
|
74A
|
Loss from the activity of
owning and maintaining race horses
|
Income from the activity of
owing and maintaining race horses.
|
4
assessment years
|
Remarks:
Past
year losses can be set-off against income from that respective head of income
(Inter head
adjustment is not possible)
Important Note:-
a) Mandatory
Filing of IT return in order to carry forward and set-off of a loss in
stipulated time
ü
As
per section 80, the assesses must have filed a return of loss under section
139(3) in order to carry forward and set off a loss. In other words, the
non-filing of a return of loss disentitles the assesses from carrying forward
the loss sustained by him. Such a return should filed within the time allowed
under section 139(1).
ü
However, this conditions does
not apply to a loss from house property carry forward under section 71B and
unabsorbed depreciation carry forward under section 32(2).
However in case return is filed
late CBDT has a power to condone delay – Circular No. 8/2001 dt 16-05-2001
ü
If return of the current year
is not submitted in time, losses of the past years are not affected.
ü
Return
of loss in the case of a sick company
If a
sick company fails to file the return of loss within the stipulated time
specified in section 139(3), and a scheme made pursuant to an order under
section 17(3) of the Sick Industrial Companies (Special Provisions) Act, 1985
is sanctioned by the Board for Industrial and Financial Reconstruction under
section 18 of that Act, specifying a particular tax treatment for the carry
forward and set off of loss incurred by the sick company, the said scheme will
have overriding effect over the provisions of section 80 of the Income-tax Act.
In such a situation the Assessing Officer will have to take cognisance of the
scheme and give effect to the carry forward and set off of loss provided for
under the scheme—Circular No. 576, dated August 31, 1990.
Earlier
the Board had issued Circular No. 523, dated October 5, 1988 in connection with
the procedure to be followed in respect of grant of “consent” by the Central
Government in cases involving financial assistance to be given under direct tax
laws for rehabilitating sick industries under Sick Industrial Companies
(Special Provisions) Act, 1985 (SICA).
Withdrawal of
circulars - The Board had withdrawn with immediate effect the
above Circular Nos. 523 and 576 vide its letter of even number dated
December 30, 1993. The said letter to AAIFR and BIFR clarified that each case
of fiscal concession of “financial assistance” under direct tax laws will now
be considered in each individual case on merits. The model agency for
coordination between the Board for Industrial and Financial Reconstruction
(BIFR) and Central Board of Direct Taxes and Appellate Authority for Industrial
and Financial Reconstruction (AAIFR) and Central Board of Direct Taxes will be
the Director General of Income-tax (Admn.), 7th Floor, Mayur Bhawan, New
Delhi-110001. Cases already decided in accordance with Circular Nos. 523 and
576 were, however, not required to be reopened— Circular No. 683, dated June 8,
1994.
b) What is Speculation business ?
ü Defined u/s 43(5) as
transaction in which a contract for purchase or sale of any commodity,
including stocks and shares, is periodically or ultimately settled otherwise
than by actual delivery or transfer of the commodity or scrips.
ü The explanation to this section
provides that where any part of business of a company consists in the purchase
and sale of the shares of other companies, such a company shall be deemed to be
carrying on speculation business to the extent to which the business consists
of the purchase and sales of shares.
However, this deeming provision
does not apply to the following companies -
1) A company whose gross total
income consists of mainly income chargeable under the heads "Interest on
securities", "Income from house property", "Capital
gains" and "Income from other sources".
2) A company, principle
business in which is -
i) the business of trading in shares; or
ii) the business of banking; or
iii) the grating of loans and advances.
Thus, these companies would be
exempted from the operation of this explanation. Accordingly, if these
companies carry on the business of purchase and sales of shares of other
companies, they would not be deemed to be carrying on speculation business.
ü
Transactions
of trading in derivatives entered into on recognized stock exchange through a
broker, or SEBI recognized intermediary and supported by a time stamped
contract note is excluded from the definition of speculative transaction u/s.
43(5)(d). Thus, loss from such transactions can be set off against any other
income.
In
simple words, Trading in derivatives shall not to be treated as speculation
business.
It
may be noted that the losses on derivatives trading were treated as speculation
losses upto a/y 2005-06. The profit/losses on derivative trading are treated as
normal business income/losses from a/y 2006-07. Therefore the losses on
derivative incurred upto a/y 2005-06 can not be setoff against the profit form
derivative trading in a/y 2006-07 and future assessment years speculation
losses can’t be set=off against non speculative income.
ü
Trading
in commodity derivatives carried out in a recognized association and chargeable
to commodities transaction tax under Chapter VII of the Finance Act, 2013 shall
not be considered to be a speculative transaction
c) Order of set-off of losses
ü As per provisions of section
72(2), brought forward business loss is to be set-off before setting off
unabsorbed deprecation. In case where profits are insufficient to absorb
brought forward losses, current depreciation and current business losses, the
same should be deducted in the following order :
i) Current year depreciation/ current year capital
expenditure on scientific research
and current year expenditure on family planning, to the extent allowed.
ii)
Brought forward loss from business/profession.
iii) Unabsorbed expenditure on family
planning
iv) Unabsorbed depreciation
v) Unabsorbed capital expenditure on scientific
research
d) Important notes on capital gains
ü Capital gain resulted from the
transfer of an depreciable asset held for a period of more than three years,
can be set off against the brought forward loss from the long term capital
assets.
ü Losses of the taxable long term
capital gains to be set off only taxable long term capital gains and not
against exempt long term capital gains. However set-off of indexed long term capital
loss can be set off against long term capital gain without indexation.
ü Long-term Capital Gains in
respect of equity shares sold in recognized stock exchange and units of equity
oriented mutual fund which has suffered Securities Transaction Tax (STT) are
exempt u/s. 10(38) with effect from 1/10/2004.
However long term gains is not exempt
in case where STT is not paid on sale e.g. off market transactions, off market
buyback, etc.
e) Loss when clubbing provision apply
ü When clubbing provisions apply,
loss is required to be clubbed in the same manner as income. Such clubbed loss
can be set off and carried forward, as if it is loss determined in the
taxpayer’s own case. The successor of business can carry forward and set off
the loss of his predecessor, if such succession is by way of inheritance.
ü Business income of wife or
minor child, clubbed under provision of section 64, with the income of assessee
can be set off against any loss brought forward by assessee in respect of a
business carried on by him—CIT v. J.H. Gotla [1985] 156 ITR 323 (SC).
e) Other Issue
ü
Loss
can be carried forward by the assesses who incurs the loss
Exceptions
·
Accumulated
business loss of an amalgamating company/demerged (section 72A).
·
Accumulated
loss of a proprietary concern or a firm when its business is taken over by a
company by satisfying conditions of section 47(xiii)/(xiv) (section 72A).
·
Accumulated
business loss of a demerged company
·
Loss
of business acquired by inheritance (section 78).CIT v. Bai Maniben [1960] 38
ITR 80 (Bom.).
ü
Loss
cannot be carried forward for more than eight assessment years
Exceptions
·
Unabsorbed
business loss in respect of rehabilitated business referred to in section 33B (such
loss can be carried forward for eight assessment years after the business is
revived including the year of revival).
·
Unabsorbed
business loss in respect of non-speculation business discontinued and after
discontinuation there is receipt deemed as business income u/s 41(1), (3),(4)
or (4A) [(section 41(5)].
Important Case laws:-
·
Losses
in illegal business must be taken into account for computation of real profits
of the illegal business.
However loss for illegal
business cannot be set off against profits of legal business – CIT v/s Kurji
Jinabhai Kotecha (1977) 107 ITR 101 (SC).
·
Losses
in one business can be set off from profits in another business – CIT v/s
Muthuram Chettiar (1962) 44 ITR 710(SC).
·
Loss
of dead business cannot be set off against the gains of a going concern
B.C.G.A (Punjab) Ltd. v/s CIT (1937) 5 ITR 279 (Lahore) & South Indian Industrials Ltd. (1935) 3 ITR 11(Mad) (applicable upto A.Y.1999-2000).
B.C.G.A (Punjab) Ltd. v/s CIT (1937) 5 ITR 279 (Lahore) & South Indian Industrials Ltd. (1935) 3 ITR 11(Mad) (applicable upto A.Y.1999-2000).
·
Loss
from exempt source of income cannot be set off against income from a different source
or income under a different head
CIT v/s Thiagarajan (1981) 129 ITR 115 (Mad)
CIT v/s Thiagarajan (1981) 129 ITR 115 (Mad)
·
Partial
set off and partial carry forward is not permissible
G.Atherton & Company v/s CIT (1989) Tax LR 13 (Cal.).
G.Atherton & Company v/s CIT (1989) Tax LR 13 (Cal.).
·
Unabsorbed
loss to be carried forward without interruption – Hiralal Jeramdas v/s CIT
(1965) 58 ITR 1 (Bom.)
·
No
option given to assessee to show profit as income from one source and carry
forward the loss from another source of income to the next year - CIT v/s Milling Trading Company. (P) Ltd.
(1994) 76 Taxman 389 (Guj.)
·
Loss
from exempt source of income cannot be carried forward (CIT v/s Harprasad &
Co. (P) Ltd. (1975) 99 ITR 118 (SC).
·
Current
depreciation must be deducted first before deducting the unabsorbed carried
forward business losses of earlier years – CIT v/s Mother India Refrigeration
Industries (P) Ltd. 155 ITR 711 (SC)
·
Whether
losses may be carried forward and set off in the following year u/s 72 to be
determined by the assessing officer dealing with the assessment in the
subsequent year (CIT v/s Manmohan Das (1966) 59 ITR 699 (SC)
·
Carry
forward of losses returns allowable even if return of losses is filed within
extended period prescribed u/s 139(3) of the Act (I.e within one year from the
end of the assessment year) [CIT v/s Glucose Products Ltd. (2001) 250 ITR
512(AP)]
·
The
term “inheritance” means only a transmission of the assets and liabilities of
one person to another by the personal law applicable to them and not by any
other mode of transfer known to law—Hindustan Aeronautics Ltd. v. CIT [1983] 15
Taxman 265 (Kar.).
·
Where
legal heirs of a deceased-proprietor enters into partnership and carries on the
same business in the same premises under the same trade name, there is
succession by inheritance as contemplated in section 78(2) and assessee-firm is
entitled to carry-forward and set-off of the deceased’s business loss against
its income for subsequent years—CIT v. Madhukant M. Mehta [2002] 124 Taxman 130
(SC).
·
Loss
incurred in speculative business in banned items cannot be carried forward to
the next year—CIT v. Kurji Jinabhai Kotecha [1977] 107 ITR 101 (SC).
·
A
transaction cannot be described as a “speculative transaction” where there is a
breach of contract and on a dispute between the parties damages are awarded as
compensation by an arbitration award—CIT v. Shantilal (P.) Ltd. [1983] 14
Taxman 1 (SC).
(Author can be reached at caagrawalpankaj@gmail.com)
Thanks and
Regards
CA Pankaj K
Agrawal
Disclaimer:
This
article contains interpretation of the Act and personal views of the author are
based on such interpretation. Readers are advised either to cross check the
views of the author with the Act or seek the expert’s views if they want to
rely on contents of this article and Information in this publication is
intended to provide only a general outline of the subjects covered. It should
neither be regarded as comprehensive nor sufficient for making decisions, nor
should it be used in place of professional advice. Pankaj Kumar Agrawal accepts
no responsibility for loss arising from any action taken or not taken by anyone
using this publication.
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