SET OFF AND CARRY FORWARD OF LOSSES of a company

Prof. Sudhansu Kumar Sahu

Factors responsible for set-off and carry forward of the losses

Income tax to be paid only when there is Income earned during the previous year. Income can be earned from five heads of income. Income includes loss If there is no income, the loss arises from that sources /head of income can be set-off with the other sources with in same P.Y., if not, can be carried forward & setoff in the subsequent year(s) with the time limit allowed under Income Tax Act.

Meaning
Set-off means adjustment of the losses from any source or any head against the profit from another source or head of income in the same Assessment year. Where as carry forward of losses arises, due to inadequacy of the profit during current year, the loss under the other sources/ head could not be set off in the same year, which will be set off in the subsequent year against the profit under the same nature of income or head of income.

Steps involved
Inter source Adjustment Sec70 Inter Head Adjustment Sec-71 Carry forward and set-ff of the losses -71B-79

Inter Source Adjustments sec.70

If the net result for any assessment year in respect of any source under any head of income is a loss, the assessee is entitled to set-off such loss against the income from any other source under the same head of income. Exceptions Loss from speculation business Loss from the activity of owning and maintaining the race horses. Loss can not be set off against winning from the lotteries, crossword puzzles etc. Long term capital loss Loss from specified Business U/s 35AD

Explanation to Sec-70
Long term Capital loss can not be set-off with the short term capital gain but short term capital loss can be setoff with long term capital gain Speculation Business loss can not be set-off with the other Business income, but other business loss can be set-off with the income from speculation business. No loss to be set off with the lottery/casual income. Exempted income or loss can not be used for set-off

Inter head Adjustment

If the net result of computation under any head of income is a loss, such loss can be set-off with the income under the other heads except the following Loss from speculation business
Loss from business can not be set off with the income against salary. Loss from the activity of owning and maintaining the race horses. Loss can not be set off against winning from the lotteries, crossword puzzles etc. Loss under the head Capital gain

Carry Forward of the losses

If the current year income is not enough to absorb the current year loss either with in or between the head of Income, such unabsorbed loss shall be carried forward to the subsequent years for necessary setoff (adjustment) with the other head of income.

Sec 71B-Carry forward and set-off of the

loss from house property
If the net result of the income from house property is a loss during the current previous year, and such loss could not be set-off with the other head of income due to insufficient income: such loss can be carried forward to the subsequent 8 Assessment year and can be set off with the income under the head Income from house property only.

Sec 72-Carry forward and set-off of the Business loss

When the net result of the computation of Total Income is a loss, due to the loss from Business and profession ,such business loss can be carried forward to the subsequent Years for necessary set-off with the income. The loss can be set-off with the Business income with in 8 Assessment Year immediately succeeding the A.Y. in which loss was first computed. The Assessee is required to file loss return u/s 139(1) of the Income tax return with in due date. But it is not applicable to the unabsorbed Depreciation.

Continued.
The loss can be set-off with the Business Income only There is no time limit for set-off of the Unabsorbed depreciation u/s 32(2). The unabsorbed depreciation can be set off with any other head of income except salary income The loss can be set-off whether business is continued or not. In case of discontinued business, the loss in the year of discontinuance shall be set-off with the income against the amount recovered from the discontinued business.

Order of priority of set-off of Business loss

Current year Depreciation, Capital Expenditure U/s 35 & capital expenditure on family planning Brought forward business loss Unabsorbed depreciation

Who is eligible to set-off

The set-off of the lossess is allowed only to the assesssee who incurred such losses but there are certain exception where successor company can set-off the loss of the previous company Loss of the Amalgamating Company in a scheme of amalgamation subject to condition amalgamated company is an Indian company Loss of the Demerged Company in a scheme of Demerger by the resulting company

Section 73:-Carry forward and set off of Speculation Loss

Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stock and share, is periodically, settled otherwise than physical delivery of goods or property. Speculation loss can be set off with the speculation income only The loss can be carried forward and set off with in 4 A.Y. immediately succeeding the AY in which loss was first computed Continuity of the Business is not necessary Filling of return with in time limit U/s 139(1)

Sec 73A:-Carry forward and set off of Specified Business Loss u/s 35AD
Loss from the specified business i.e. Cold chain facility, cross country natural gas pipe lines etc. which could not be set off with the other head of income, such loss shall be carried forward to the for 8 AY immediately succeeding the AY in which loss was first computed. Such loss can be set-off with the same business income in the subsequent year.

Filling of the IT return with in time limit is mandatory.

Sec 74 :Carry Forward and set off of the Capital loss

If the net result of computation under the head capital gain, such capital loss can be carried forward for 8 Assessment year. The long term capital loss can be set-off long term capital Gain The short term capital loss can be set-off with the long term capital gain or short term capital gain The assessee is required to file return with in time limit U/s 139(1) It can be set off only in the hands of the assessee

Loss from the activity of owning and maintaining the race horces can be carried forward to subsequent year It can be set off with the income from same activity only Loss can be carried forward for 4 Assessment year The return has to be filed with in time limit

Carry forward and set-off of loss from the activity of owning and maintaining race horces

Carry forward and set-off of losses incase of Merger ,Demerger

The depreciation and business loss of the amalgamating company & demerged company, such loss can be carried forward by the amalgamating company and resulting company respectively from the year in which business has been restructured The loss can be carried for the balance period of loss which would have availed by the transferred company.

The scheme must be approved by the commissioner of income tax

Cont..
Condition:- The amalgamating company has been engaged at least 3 years or more The amalgamating company has held continuously at least 3/4th of the book value assets at least 2 years prior to date of amalgamation The amalgamated company is required to hold at least 5 years, 3/4th of the book value of assets of the amalgamating company. And continued the business for 5 yrs

Sec 79 :Carry forward and set-off of losses incase of a company in which public are not substantially interested The tax payer is company in which public are not substantially interested The loss of such company can be carried forward and set off by the same company subject to condition the persons beneficially holding 51%shares/voting rights ,the same % of shares must be holding both in the year of loss and in the year of set-off

This is not applicable in case death of share holders & transfer of shares by way of gift.

Case studies
X ltd files its return of loss for the assessment year 2011-12 on December 1, 2011.the following data is taken from return submitted by the company: Business loss for the previous year 2009-10 ( before depreciation & capital expenditure on scientific research)-170000 Depreciation-30,000 Capital exp. for scientific research-20,000 Short term capital loss-45,000

continued
Long term capital gain-10,000 Interest on Bank Deposit Rs 4,50,000 after deduction of TDS @10% Brought forward loss of earlier year which has been returned in pursuance of return filed within the time section139(1) Unabsorbed depreciation pertaining to the assessment year 1997-98 & 1998-99 -57000 Business loss of the previous year 2004-05-18000 Capital loss of the previous year 9-10 -35000. Compute the taxable income and tax liability for A.Y.201112

Case study 2
M/s L &T Ltd has the following income during the relevant previous year 2010-11.The details of income are furnished below.

1. Profit of business A for the P.Y.2010-11 is Rs 12.00lacs

2.Brought forward of business loss for 2008-09 Rs1.45 lacs 3.profit of business B (speculative) Rs 2.00lacs 4.loss from business C (speculative)Rs 3.50 lacs 5.Int. on debenture held as stock in trade Rs 3.00lacs 6. sale of a land and long term capital gain is 100.00 lacs 7.Dividend received from an Indian company Rs1.00lac

8.Dividend from Foreign company Rs0. 50 lacs

Compute taxable income and tax liability for the AY 2011-12