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SET OFF AND CARRY FORWARD OF LOSSES CA Sanjay Bansal, Bansal & Co. Chartered Accountants sanjay@bansal. com 11/07/2012
Set off of losses Provision of section 70 to 80 of IT Act involves following three steps : 1. Inter source adjustment / Intra source adjustment 2. Inter head adjustment in same AY 3. Carry forward of loss to the subsequent AY to claim it as set off if it could not be set off under step 1 and step 2
Set off of losses CY provisions (Sec. 70) • Set off of loss from one source against income from another source under the same head of income (sec. 70) –(except capital gain). 1. Exception 1 – Loss from speculation business included in “PGBP” head. Meaning of speculative transaction- contract for sale or purchase of any commodity including stock and shares, is periodically settled otherwise than by the actual delivery. 2. Exception 2 - Loss from the activity of owning & maintaining race horses included in “Other source” head. 3. Exception 3 – Loss from Specified business u/s 35 AD (Sec. 73 A) (Cold Chain, Warehousing, hotel, hospital etc. ). 4. Exception 4 - Loss can not be set off against winning from lotteries, crossword, horse races etc.
Set off of losses CY provisions (Sec. 70) 5. Loss arising from the purchase and sale of securities not to be allowed in certain cases (sec. 94(7))- to the extend of loss does not exceed the amount of dividend or income received on such securities or units of MF shall be ignored for the purpose of computing taxable income 6. Bonus stripping in case of units - provision says, to the person who acquired the bonus units in such tax avoidance transaction, if any loss arising out of sale & purchase of such unit, will not be included in computation of total income.
Example X has two businesses – A & B. Profit From Business A `. 500, 000/- Loss From Business B `. 200, 000/- The Loss of `. 200, 000/- can be set off with his Profit of `. 500, 000/-. Therefore the amount taxable under the head Profit & Gains from Business will be (`. 500, 000–`. 200, 000) `. 300, 000/-
Rules of Intra-Head Set-off Loss from House Property • INCOME FROM OTHER HOUSE PROPERTY Non Speculation Business Loss • INCOME FROM SPECULATION AND NON SPECULATION PROFITS Speculation Business Loss Short Term Capital Loss • INCOME FROM SPECULATION PROFITS
Long term capital loss Loss from any other activity • Long term capital gain only • Any income other than winnings from lotteries, crossword puzzles etc
Set off of loss – inter head (sec. 71) • After considering intra head adjustment, if any loss is there in one head that can be adjust against income of any other head except – “capital gain”
Exceptions Speculation Loss – Cannot be set off against any other head. Capital Loss - Cannot be set off against any other head except ‘Capital Gains’. Loss from the activity of owning and maintaining race horses - Cannot be set off against any other head. Business loss cannot be set off with Salary. Loss cannot be set off against winnings from lotteries, crossword puzzles etc. Loss from purchase of securities. Loss from a Source income of which is exempt. CIT v. Hariprasad & Co. P Ltd.  99 ITR 118 (SC).
Decided cases on set off losses in CY income • Benefits u/s 70 can be claimed even in the case of clubbing of income u/s 64, ex. the loss of an individual is eligible for set off against clubbed income of minor child. CIT v. JH Gotla  156 ITR 323 (SC). • If there is profit from one source of income and loss from another, the assessee has no option but to set off the loss against such profits if it is permissible under section 70. G. Atherton & Co. v CIT  Tax LR 13 (Cal) AND CIT v. Milling Tdg Co P Ltd  76 Taxman 389 (Guj)
Rules Loss from House Property Business Loss under the head ‘Income from other sources’ • • Business Income Capital gains Salary Income from Other Sources • House property income • Capital Gains • Income from Other Sources • • Salary House Property Income Business income Capital Gains
Carry Forward and Set Off of Loss From House Property (Sec. 71 B) • Loss can be carried forward for eight assessment years.
Example Income from House I – 60, 000 Loss from House II – (30, 000) NET INCOME 30, 000 He has brought forward losses H 1 (98 -99) 30, 000 (2004 -05) 35, 000 98 -99 H 1 loss will be ignored. Loss of 04 -05 will be adjusted with 30, 000. Therefore 5, 000 will be carried forward. H 2
Example X has two non speculative businesses A & Besides he has income from house B. property. Profit From Business A `. 70, 000 Loss From Business B `. 290, 000. Income from House property `. 510, 000 The Net Loss from both businesses of `. 220, 000 (290, 00070, 000) can be set off with House Property income of `. 510, 000. Therefore the net income taxable is `. 290, 000/-
Carry Forward & set off of losses Following losses are allowed to Carry Forward 1. 2. 3. 4. 5. House Property Losses Business Loss Speculation Loss Capital Loss on account of owning and maintaining race horses
Carry Forward of Business Loss other than Speculation Loss (Sec. 72) • Loss can be set off only against business income. • Losses can be carried forward by the person who incurred the loss. • Loss can be carried forward for 8 years. • Return of loss should be submitted in time. • Continuity of business not necessary. • Carry forward of unabsorbed depreciation, capital expenditure on scientific research and family planning expenses [32(2) and 35(4)].
Ø Order of set off of business losses from business income ØCY Depreciation [59 ITR 555 (SC)] Ø CY Capital Exp on Scientific Research and CY Family Planning Ø B/F Business Loss [Due to Sec. 72(2)] ØUnabsorbed Depreciation ØUnabsorbed Capital Expenditure on Scientific Research ØUnabsorbed Expenditure on Family Planning Ø Return of loss
Provisions related to Business Losses ØLosses incurred in following case can be adjusted even if the person is not same for set off ØInheritance (Unabsorbed Depreciation not allowed) ØAmalgamation ØSuccession of proprietary concern or firm by a Company ØDemerger ØPeriod of Carry forward of 8 years, in following , carry forward timing would be indefinite ØUnabsorbed depreciation ØUnabsorbed capital expenditure of scientific research ØUnabsorbed expenditure on family planning
Set off incase of Change in Constitution [Sec. 72 A] Unabsorbed business loss can be carry forward up to 8 years from the year of amalgamation/ demerger/ change in constitution in case of : 1. 2. 3. 4. Amalgamating to Amalgamated Demerged to Resulting Company Firm or Propriety Concern to Successor Company Closely held Company to LLP
Conditions to be Satisfied for Carry Forward in case of Amalgamation should be of – 1. A company owning an industrial undertaking or a ship or a hotel with another company. 2. A Banking Company with Specified Bank. 3. PSUs engaged in business of operation of aircrafts.
Conditions to be Satisfied by Amalgamating Company • The unabsorbed business loss are from the main activity of said company it is in business for preceding 3 or more years. • As on date of amalgamation, amalgamating company has held continuously 75% of the book value of fixed assets held by it two years prior to the date of amalgamation.
Conditions to be satisfied by amalgamated company • The company should holds continuously for a minimum period of 5 years -75% of book value of fixed assets. (2 years for old company) • The company should continuous the business of amalgamating company for at least 5 years. (Old company should have been in business for 3 yr) • Any other conditions to be satisfied if require to ensure genuine amalgamation. • In case of non-compliance later, amount set off to be considered as income of that year.
Conditions to be Satisfied for Demerger. . • If the Loss directly attributable to transferred undertaking, entire loss to be carried forward by resulting company. • If not directly relatable, loss to be apportioned in same ratio as adopted for apportionment of fixed assets.
Conditions to be Satisfied for Succession of Firms etc. . All the assets/liabilities of firm immediately before succession becomes assets/liabilities of company. In firm, all partners become shareholders in company in same ratio as in partnership (Minimum 50% for five years). In Prop Firm, Sole Proprietor becomes shareholder for at least 50% (For five years). No benefit to partners/proprietor other than shares allotted. For Non Compliance later, set off to be taken as income of that year.
Conditions to be Satisfied for Conversion to LLP. . All the assets/liabilities of company immediately before conversion becomes assets/liabilities of LLP. In firm, all shareholders become partners in LLP in same proportion as in company (Minimum 50% for five years). Turnover of Company <60 L for past 3 years. No benefit to shareholders other than share in ‘future’ profits of LLP. No payments from accumulated profits on conversion date for 3 years. For Non Compliance later, set off to be taken as income of that year.
Carry Forward of Speculation Loss (Sec. 73) • Speculative loss can be set off only against speculative income. • Can be carried forward for 4 years. • Continuity of Business is not necessary. • Return of Loss should be submitted in time.
Speculation Business Sec 43(5) Transaction involving purchase or sale of any commodity Periodically settled Actual delivery Transfer of commodity or scripts
Speculation Business • Fiction created by Explanation to Sec. 73 • Delivery based loss on shares also speculation. Paharpur Cooling Towers Ltd v. ACIT (2011) 52 DTR 41 (Cal). • If the money lending business was included in main object, share loss not speculation. CIT v. Frontline Securities Ltd. (2011) 50 DTR 337 (Del. )
Speculation Business • Test of majority of funds employed for inv activities for deciding principal business ITO v. Bijay Paper Traders & Inv Ltd (2010) 38 SOT 578 (Del) (ITAT). • Loss even on a/c of valuation of stock of shares, is speculation loss. Prasad Agencies P Ltd. (2009) 213 Taxman 571 (Bom. ) • Units of MF can not be treated as shares for the purpose of Explanation to Sec 73. Apollo Tyres v. CIT.  255 ITR 273 (SC)
Carry forward of Capital Losses (Sec. 74) Long term capital loss can be set off only against long term capital gains. Short term can be set off against short term or long term capital gains. Such loss can be carried forward for 8 assessment years immediately succeeding the assessment year in which the loss was first computed. Such loss can not be carried forward unless return is filed within the time limit of the section.
Carry forward of Capital Losses Ø Capital loss computed by assessee with indexation cost can be setoff against long term capital gains computed without indexation. Keshav S. Phansalkar (2009) 32 DTR 454 (Mum) (ITAT) and Mohanlal N. Shah HUF (2008) 26 SOT 380 (Mum)
Loss from the Activity of Owning and Maintaining Race Horse. . (Sec. 74 A) A person incurring loss from such activity means expensed for Maintaining the horses , where no stake money is there or Loss = (Maintenance Exp. - stake money ) Such loss could be CF and set off against the same income only , for the period up to 4 years. Participation in Race not mandatory.  250 ITR 177 (Mad). Loss from racing activity can be set off against Profit from sale of horses. CIT v. Mrs. Sunita Kumar  208 ITR 807 (Cal. )
Substantial Change in shareholding of Companies. . (Sec. 79) • At least 51% of shareholders should be same as was the position in the year in which loss was incurred. • Transmission of shares on death or gift to a relative is not included in above.
Substantial Change in shareholding of Companies. . (Sec. 79) • Merger of Holding Co. into Subsidiary Co. • Holding Co. held 98% of assessee co. • Post merger, shareholders of holding co. allotted shares in subsidiary. • Carry Forward of Loss to be allowed • Dy. CIT v. Select Holiday Resorts P Ltd (2011) 52 DTR 14 (Del) (ITAT).
Special point to be consider • Where the losses incurred are not set off against the income of the immediately succeeding year/years as the case may be, it was held that it can not be set off in later date (Tyresoles (India) V CIT) • For Business, Speculation and Capital Loss C/F, filing of return within due date is mandatory. Sec. 80 r. w. s. 139(3). • If belated, no c/f even if assessment u/s 143(3). Joginder Paul HUF v CIT (2011) 239 CTR 566 (P&H).
Special point to be consider • Stock stored in State warehousing corp was destroyed by fire in the 1978. Suit filed for reimbursement of loss. Suit dismissed in 1982. Loss was allowable in the year 1983 -84. New Diwan Oil Mills vs. CIT (2010) 328 ITR 432 (P&H). • While computing deduction under section 80 HHA with regard to income derived from industrial u/t, loss from a non industrial unit, in terms of section 80 AB and section 71, has to be adjusted first. CIT vs. Mentha & Allied Products (2010) 326 ITR 297 / 47 DTR 284 (All)
Special point to be consider • AO must allow set off even if it is not claimed by assessee. CIT v. Mahalakshmi Sugar Mills Co. Ltd  160 ITR 920 (SC). • When there is nothing given in Act regarding mode of set off, the Dept should adopt an approach beneficial to the assessee. Circular No. 26 dated 7 -7 -1955 [F. No. 4(53)-IT/54]. • Before giving effect to Sec 72 and Sec 74, set off u/s 71 shall be made first. Circular No. 587 dated 11 -12 -1990.
Provisions in brief Type of Loss to be carried forward to the next year(s) Income against which carried forward loss can be set off in next year(s) Years HOUSE PROPERTY LOSS INCOME FROM HOUSE PROPERTY 8 YEARS. SPECULATION LOSS SPECULATION PROFITS 4 YEARS. Unabsorbed Depreciation, Scientific Research & Family Planning Expenditure ANY INCOME NO TIME LIMIT Other Business Losses SPECULATIVE AND NON SPECULATIVE 8 YEARS SHORT TERM CAPITAL LOSS SHORT AND LONG TERM GAINS 8 YEARS LONG TERM CAPITAL LOSS LONG TERM CAPITAL GAINS 8 YEARS LOSS FROM ACTIVITY OF OWNING & MAINTAINING RACE HORSES INCOME FROM SUCH ACTIVITY 4 YEARS NON SPECULATION BUSINESS LOSS: