Set Off of Losses or Carry Forward and Set Off of Losses

CA Priya Fulwani

SET OFF OF LOSS FROM ONE SOURCE AGAINST INCOME FROM ANOTHER SOURCE UNDER THE SAME HEAD OF INCOME (INTER SOURCE)
Section under Income Tax Act 1961

Interpretation Exceptions/Case laws Section 70:
(1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than “Capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.

(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.

(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.]

a) If the net result for any Assessment year (herewith mentioned as “AY”), in respect of any source under any head of income, is a loss, the assessee is entitled to have the amount of such loss set off against his income from any other source under the same head of income for the same AY.

b) In other words,

i) loss from a house property can be set off against the income from any other house property;

ii) loss from a non-speculative business can be set off against income from speculative or non-speculative business;

iii) loss from a non-speculative business can be set off against income specified under section 35AD;

iv) short term capital loss can be set off against short/long term capital gain;

v) under the head “Income from other sources” loss from an activity (other than owning and maintaining race horses) can be set off against any income but other than winnings from lotteries, crossword puzzles, etc.

a) Loss in a speculation business can be set off only against the profit in a speculation business. – Refer Section 72(1).

b) Any loss, computed in respect of any specified business referred to in section 35AD, shall not be set off except against profits and gains, if any of any other specified business. (Applicable from AY 2010-11 onwards). – Refer Section 73A.

c) Long term Capital loss can be set off only against long term capital gain. – refer Section 74.

d) Loss incurred in the business of owning and maintaining race horses cannot be set off against any income except income from such business. – Refer Section 74.

e) By virtue of Section 58(4), a loss cannot be set off against winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature.

SET OFF OF LOSS FROM ONE HEAD AGAINST THE INCOME FROM ANOTHER (INTER HEAD)

Section under Income Tax Act 1961 Interpretation Exceptions/Case laws Section 71:
(1) Where in respect of any assessment year the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has no income under the head “Capital gains”, he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.

(2) Where in respect of any assessment year, the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has income assessable under the head “Capital gains”, such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head “Capital gains” (whether relating to short-term capital assets or any other capital assets).

[(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss and the assessee has income assessable under the head “Salaries”, the assessee shall not be entitled to have such loss set off against such income.]

(3) Where in respect of any assessment year, the net result of the computation under the head “Capital gains” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.]

[(4) Where the net result of the computation under the head “Income from house property” is a loss, in respect of the assessment years commencing on the 1st day of April, 1995 and the 1st day of April, 1996, such loss shall be first set off under sub-sections (1) and (2) and thereafter the loss referred to in section 71A shall be set off in the relevant assessment year in accordance with the provisions of that section.]

a) Where the net result of computation made for any AY in respect of any head of income is a loss, the same can be set off against the income from other heads.b) Before adjusting loss u/s 71, one has to set off the loss u/s 70.c) Any loss can be set off against income under other heads of income for the same year. For instance, house property loss can be set off against speculative profit.d) No order of priority is given in the Act. One should try to first set off those losses which cannot be carried forward to the next year. a) Loss in a speculation business cannot be set off against any other income.b) Loss, computed in respect of any specified business referred to in Section 35AD, cannot be set off against any other income.c) Losses under the head “Capital Gains” cannot be set off against income under other heads of income.d) Loss from business or profession (including unabsorbed depreciation) cannot be set off against income under the head “Salaries”.e) The section does not permit the assessee to have only a part of the loss to be set off against the income from other heads and carry forward the balance. Such computation would be wholly artificial, contrary to the accepted principles of accountancy and will not reflect the correct income of the assessee in any particular year – G. Artherton & Co. CIT 1989 Tax LR 13 (Cal.).
CARRY FORWARD AND SET OFF OF BUSINESS LOSSES.

Section under Income Tax Act 1961 Interpretation Exceptions/Case laws Section 72:
[(1) Where for any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ;

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :]

[Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, reconstructed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and—

(a) it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year; and

(b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding.]

(2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section.

(3) No loss [(other than the loss referred to in the proviso to sub-section (1) of this section)] shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

a) If there is a loss under the head “Profits and gains of business or profession” other than loss from speculation business, then such loss would be carried forward to next assessment year and would be set off against the profits and gains if any derived from any business or profession.

b) Proviso: If 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 or without a declaration of war),

And because of this there is a business loss and such business is re-established, reconstructed or revived, within 3 years then such loss would be carried forward to the assessment year in which the business is re-established, reconstructed or revived and it shall be set off against the business income if any.

Also if such loss is not wholly set off then such loss would be carried forward for next 7 immediately succeeding years.

c) The losses other than those mentioned in proviso to section 72(1) shall be carried forward for 8 assessment years.

a) Business income of wife or minor child, clubbed u/s 64 with the income of the 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).

b) If income from a particular source is exempt from tax, e.g., income exempt from tax u/s 10, loss from such source cannot be set off against income chargeable to tax. Loss of profits must be a loss of Taxable profits – Ramjilal Rais v. CIT [1965] 58 ITR 181 (All.).

c) Even current year’s loss can be set off against undisclosed income declared in a survey – CIT v. Shilpa Dyeing & Printing Mills (P.) Ltd. [2013] 219 Taxmann 279 (Guj.).

c) In case where profits are insufficient to absorb brought forward losses, current depreciation and current business losses, the same should be deducted in following order:

i) Current scientific research expenditure [Sec 35(1)].

ii) Current depreciation [Sec 32(1)].

iii) Brought forward business losses [Section 72(1)].

iv) Unabsorbed family planning promotion expenditure [Sec 36(1)(ix)].

v) Unabsorbed depreciation [Sec 32(2)].

vi) Unabsorbed scientific research capital expenditure [Sec 35(4)].

vii) Unabsorbed development allowance [Sec 33A(2)(ii)].

viii) Unabsorbed investment allowance [Sec 32A(3)(ii)].

LOSSES IN SPECULATION BUSINESS.

Section under Income Tax Act 1961 Interpretation Exceptions/Case laws
Section 73:

(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.

(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

(i)          it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and

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

(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.

(4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed.

Explanation.—Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”, or a company [the principal business of which is the business of trading in shares or banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.

a) Any loss suffered from speculation business shall be set off from another speculation business only and not any other income

b) If such speculation loss is not wholly set off against the income from speculation business then such loss can be carried forward to next immediately succeeding assessment year and so on. These losses shall not be carried forward for more than 4 assessment years for set off.

c) There is no limit of number of years to carry forward loss arising from capital expenditure on scientific research and depreciation for set off.

d) If any part of the business of company is involved in purchase and sale of shares then such part of the business shall be deemed to be carrying on speculative business.

a) As it can be seen from Section 73, the explanation to Section 73 does not apply to following companies:

1) Companies whose gross total income consists mainly of income which is chargeable under the heads ‘Income from house property’, ‘Capital Gains’ and ‘Income from other sources’.

2) Companies whose principle business is the business of banking or (w.e.f. from AY 2015-16) trading in shares or the business of granting loans & advances.

3) Companies not doing business in shares

4) Companies doing business in units of UTI (as units are not “shares”) – CIT v. Appollo Tyres Ltd. [1998] 101 Taxman 164 (Ker.) Porrits & Spencer (AsiaO) Ltd. V. CIT [2010] 190 Taxman 174 (Punj. & Har.).

5) Companies dealing in Government Securities – ANZ Grindlays Bank v. CIT [2004] 88 ITD 53 (Delhi).

b) 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).

Losses from certain specified sources falling under the head “Income from other sources”.

Section under Income Tax Act 1961 Interpretation Exceptions/Case laws
Section 74A:

(1) & (2) – Omitted.

(3) In the case of an assessee, being the owner of horses maintained by him for running in horse races (such horses being hereafter in this sub-section referred to as race horses), the amount of loss incurred by the assessee in the activity of owning and maintaining race horses in any assessment year shall not be set off against income, if any, from any source other than the activity of owning and maintaining race horses in that year and shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and—

(a)         it shall be set off against the income, if any, from the activity of owning and maintaining race horses assessable for that assessment year :

Provided that the activity of owning and maintaining race horses is carried on by him in the previous year relevant for that assessment year; and

(b)         if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on; so, however, that no portion of the loss shall be carried forward for more than four assessment years immediately succeeding the assessment year for which the loss was first computed.

Explanation.—For the purposes of this sub-section—

(a)         “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;

(b)          “horse race” means a horse race upon which wagering or betting may be lawfully made;

(c)          “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.

a) The amount of loss arising from activity of owning and maintaining race horses cannot be set off against any other income except that of owning and maintaining race horses only.

b) If the amount of loss cannot be wholly set off then the balance loss can be carried forward for next immediately 4 succeeding assessment years.

c)The amount of loss would be calculated as below:

i) if assessee has no income by way of stake income (i.e. prize money earned), then the whole of revenue expenditure laid out or expended wholly and exclusively for maintaining race horses.

ii) if assessee has stake income then the whole of revenue expenditure laid out or expended wholly and exclusively for maintaining race horses minus stake income.

a) The explanation to section 74A(3) refers to maintenance of race horses. If the horses are maintained for the purpose of racing, the requirement of Section 74A(3) is fully met. Further requirement that such horses should have participated in the race in the year relevant to the AY cannot be read into the section – CIT v. R.M.S. & Sons [2002] 120 Taxman 237 (Mad.).

b) Section 74A is applicable only in case of loss from the activity of owning & maintaining race horses. Loss from the activity of owning & maintaining other race animals is governed by section 72 and not be section 74A.

Carry forward and set off of losses in the case of certain companies.

Section under Income Tax Act 1961 Interpretation Exceptions/Case laws Section 79:
Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless—

(a)         on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred:

Provided that nothing contained in this section shall apply to a case where a change in the said voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift:

Provided further that nothing contained in this section shall apply to any 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 subject to the condition that fifty-one per cent shareholders of the amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company.

a) If the below mentioned conditions are satisfied the brought forward loss cannot be set off:

Condition 1:       The Taxpayer is a company in which the public are not substantially interested

Condition 2:       The persons beneficially holding 51% of the voting power on the following dates are different:

i) on the last day of the Previous year in which the loss was incurred

ii) on the last day of the previous year in which the company wants to set off the brought forward loss.

b) Amalgamation/Demerger of a foreign holding company:

Section 79 is not applicable if following conditions are satisfied:

Condition 1:       The company in which loss is incurred is an Indian Company in which public are not substantially interested.

Condition 2:       It is a subsidiary of a foreign company.

Condition 3:       The foreign company is amalgamated/demerged with another foreign company.

Condition 4: Persons holding 51% or more shares in the amalgamating/demerged foreign company become shareholders in the amalgamated/resulting foreign company.

a) Section 79 does not specify change in directorship or change in management as a criteria – Sunanda Capital Services Ltd v. CIT[2009] 28 SOT 484 (Mum.).

b) Carry forward of losses cannot be denied on ground of change in shareholding due to merger if management of company continues to remain with same set of people – CIT v. Select Holiday Resorts (P.) Ltd. [2013] 35 taxmann.com 368 (Delhi).

c) Provisions of section 79 are applicable only in case of carry forward of losses. As carry forward of unabsorbed depreciation, capital expenditure on scientific research and family planning stand altogether on different footings, their carry forward and set off are not governed by Section 79 – CIT v. Concord Industries Ltd. [1979] 119 ITR 458 (Mad.).

Section 80 – Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139, shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.

The table below highlights the rule for carry forward of loss:

a) By filing a loss return in pursuance of a notice u/s 148 but beyond time available for filing a voluntary return u/s 139(1), the assessee cannot be entitled to determination of loss for the purpose of carry forward and set off – Koppind (P.) Ltd v. CIT[1994] 207 ITR 228/77 Taxman 359 (Cal.).

b) However, CBDT has power u/s 119(2) to condone delay in case of a return which is filed late and where a claim for carry forward of losses is made – Lodhi Property Co. Ltd. V. Department of Revenue [2010] 191 Taxman 74 (delhi).

c) Moreover, disentitlement for carry forward of loss u/s 80 comes into play only when the original income tax return disclosing loss sought to be carried forward is not filed within time prescribed u/s 139(1); date of filing revised return is not to be considered for this purpose – CIT v. Ashok Walia [2013] 60 SOT 72 (Kol.).