SET OFF AND CARRY FORWARD OF SET OFF AND CARRY FORWARD OF LOSSES of a companyLOSSES of a company

Prof. Sudhansu Kumar SahuProf. 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 & set-off in the subsequent year(s) with the time limit allowed under Income Tax Act.

MeaningMeaning

• Set-offSet-off means adjustment of the losses from means adjustment of the losses from any source or any head against the profit from any source or any head against the profit from another source or head of income in the same another source or head of income in the same Assessment year.Assessment year.

• Where as carry forward of losses arises, due Where as carry forward of losses arises, due to inadequacy of the profit during current to inadequacy of the profit during current year, the loss under the other sources/ head year, the loss under the other sources/ head could not be set off in the same year, which could not be set off in the same year, which will be set –off in the subsequent year against will be set –off in the subsequent year against the profit under the same nature of income or the profit under the same nature of income or head of income.head of income.

Steps involvedSteps involved

• Inter source Adjustment – Sec70Inter source Adjustment – Sec70• Inter Head Adjustment – Sec-71Inter Head Adjustment – Sec-71

• Carry forward and set-ff of the Carry forward and set-ff of the losses -71B-79losses -71B-79

Inter Source Adjustments –Inter Source Adjustments –sec.70sec.70

• If the net result for any assessment year in respect of If the net result for any assessment year in respect of any source under any head of income is a loss, the any source under any head of income is a loss, the assessee is entitled to set-off such loss against the assessee is entitled to set-off such loss against the income from any other source under the same head of income from any other source under the same head of income. income.

• ExceptionsExceptions    Loss from speculation businessLoss from speculation business  Loss from the activity of owning and maintaining the race Loss from the activity of owning and maintaining the race

horses.horses.Loss can not be set off against winning from the Loss can not be set off against winning from the

lotteries, crossword puzzles etc.lotteries, crossword puzzles etc.    Long term capital lossLong term capital loss• Loss from specified Business U/s 35ADLoss from specified Business U/s 35AD

Explanation to Sec-70Explanation to Sec-70

• Long term Capital loss can not be set-off with the Long term Capital loss can not be set-off with the short term capital gain but short term capital short term capital gain but short term capital loss can be set-off with long term capital gainloss can be set-off with long term capital gain

• Speculation Business loss can not be set-off with Speculation Business loss can not be set-off with the other Business income, but other business the other Business income, but other business loss can be set-off with the income from loss can be set-off with the income from speculation business.speculation business.

• No loss to be set off with the lottery/casual No loss to be set off with the lottery/casual income.income.

• Exempted income or loss can not be used for Exempted income or loss can not be used for set-offset-off

Inter head AdjustmentInter head Adjustment

• If the net result of computation under any If the net result of computation under any head of income is a loss, such loss can be head of income is a loss, such loss can be set-off with the income under the other set-off with the income under the other heads except the followingheads except the following

    Loss from speculation businessLoss from speculation business

  Loss from business can not be set off with the income Loss from business can not be set off with the income against salary.against salary.

  Loss from the activity of owning and maintaining the race Loss from the activity of owning and maintaining the race horses.horses.

  Loss can not be set off against winning from the lotteries, Loss can not be set off against winning from the lotteries, crossword puzzles etc.crossword puzzles etc.

    Loss under the head Capital gain Loss under the head Capital gain

Carry Forward of the lossesCarry Forward of the losses

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

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

loss from house propertyloss from house property If the net result of the income from house property is a If the net result of the income from house property is a

loss during the current previous year, and such loss loss during the current previous year, and such loss could not be set-off with the other head of income due to could not be set-off with the other head of income due to insufficient income:insufficient income:

such loss can be carried forward to the subsequent 8 such loss can be carried forward to the subsequent 8 Assessment year and can be set off with the income Assessment year and can be set off with the income under the head Income from house property only. under the head Income from house property only.

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

Business lossBusiness loss When the net result of the computation of Total When the net result of the computation of Total

Income is a loss, due to the loss from Business and Income is a loss, due to the loss from Business and profession ,such business loss can be carried profession ,such business loss can be carried forward to the subsequent Years for necessary set-forward to the subsequent Years for necessary set-off with the income.off with the income.

The loss can be set-off with the Business income The loss can be set-off with the Business income with in 8 Assessment Year immediately succeeding with in 8 Assessment Year immediately succeeding the A.Y. in which loss was first computed.the A.Y. in which loss was first computed.

The Assessee is required to file loss return u/s The Assessee is required to file loss return u/s 139(1) of the Income tax return with in due date. 139(1) of the Income tax return with in due date. But it is not applicable to the unabsorbed But it is not applicable to the unabsorbed Depreciation.Depreciation.

Continued……….Continued………. The loss can be set-off with the Business The loss can be set-off with the Business

Income onlyIncome only There is no time limit for set-off of the There is no time limit for set-off of the

Unabsorbed depreciation u/s 32(2). The Unabsorbed depreciation u/s 32(2). The unabsorbed depreciation can be set off with any unabsorbed depreciation can be set off with any other head of income except salary income other head of income except salary income

The loss can be set-off whether business is The loss can be set-off whether business is continued or not.continued or not.

In case of discontinued business, the loss in the In case of discontinued business, the loss in the year of discontinuance shall be set-off with the year of discontinuance shall be set-off with the income against the amount recovered from theincome against the amount recovered from the discontinued business.discontinued business.

Order of priority of set-off Order of priority of set-off of Business lossof Business loss

• Current year Depreciation, Capital Current year Depreciation, Capital Expenditure U/s 35 & capital expenditure Expenditure U/s 35 & capital expenditure on family planningon family planning

• Brought forward business lossBrought forward business loss

• Unabsorbed depreciationUnabsorbed depreciation

Who is eligible to set-offWho is eligible to set-off

• The set-off of the lossess is allowed only to The set-off of the lossess is allowed only to the assesssee who incurred such losses but the assesssee who incurred such losses but there are certain exception where successor there are certain exception where successor company can set-off the loss of the previous company can set-off the loss of the previous companycompany

• Loss of the Amalgamating Company in a Loss of the Amalgamating Company in a scheme of amalgamation subject to scheme of amalgamation subject to condition amalgamated company is an condition amalgamated company is an Indian companyIndian company

• Loss of the Demerged Company in a scheme Loss of the Demerged Company in a scheme of Demerger by the resulting companyof Demerger by the resulting company

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

LossLoss Speculative transaction means a transaction in which Speculative transaction means a transaction in which

a contract for the purchase or sale of any commodity, a contract for the purchase or sale of any commodity, including stock and share, is periodically, settled including stock and share, is periodically, settled otherwise than physical delivery of goods or property. otherwise than physical delivery of goods or property.

Speculation loss can be set off with the speculation Speculation loss can be set off with the speculation income onlyincome only

The loss can be carried forward and set off with in 4 The loss can be carried forward and set off with in 4 A.Y. immediately succeeding the AY in which loss A.Y. immediately succeeding the AY in which loss was first computedwas first computed

Continuity of the Business is not necessaryContinuity of the Business is not necessary Filling of return with in time limit U/s 139(1)Filling of return with in time limit U/s 139(1)

Sec 73A:-Carry forward and Sec 73A:-Carry forward and set off of Specified Business set off of Specified Business

Loss u/s 35ADLoss u/s 35AD• Loss from the specified business i.e. Cold chain Loss from the specified business i.e. Cold chain

facility, cross country natural gas pipe lines etc. facility, cross country natural gas pipe lines etc. which could not be set off with the other head of which could not be set off with the other head of income, such loss shall be carried forward to the income, such loss shall be carried forward to the for 8 AY immediately succeeding the AY in for 8 AY immediately succeeding the AY in which loss was first computed.which loss was first computed.

• Such loss can be set-off with the same business Such loss can be set-off with the same business income in the subsequent year.income in the subsequent year.

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

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

If the net result of computation under the head If the net result of computation under the head capital gain, such capital loss can be carried capital gain, such capital loss can be carried forward for 8 Assessment year.forward for 8 Assessment year.

The long term capital loss can be set-off long term The long term capital loss can be set-off long term capital Gaincapital Gain

The short term capital loss can be set-off with the The short term capital loss can be set-off with the long term capital gain or short term capital gainlong term capital gain or short term capital gain

The assessee is required to file return with in time The assessee is required to file return with in time limit U/s 139(1)limit U/s 139(1)

It can be set off only in the hands of the assessee It can be set off only in the hands of the assessee

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

race horcesrace horcesLoss from the activity of owning and Loss from the activity of owning and maintaining the race horces can be maintaining the race horces can be carried forward to subsequent yearcarried forward to subsequent year

It can be set off with the income from It can be set off with the income from same activity onlysame activity only

Loss can be carried forward for 4 Loss can be carried forward for 4 Assessment yearAssessment year

The return has to be filed with in time The return has to be filed with in time limitlimit

Carry forward and set-off of Carry forward and set-off of losses incase of losses incase of

Merger ,Demerger Merger ,Demerger The depreciation and business loss of the The depreciation and business loss of the

amalgamating company & demerged amalgamating company & demerged company, such loss can be carried forward by company, such loss can be carried forward by the amalgamating company and resulting the amalgamating company and resulting company respectively from the year in which company respectively from the year in which business has been restructuredbusiness has been restructured

The loss can be carried for the balance period The loss can be carried for the balance period of loss which would have availed by the of loss which would have availed by the transferred company.transferred company.

The scheme must be approved by the The scheme must be approved by the commissioner of income tax 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 Sec 79 :Carry forward and set-off of losses incase of a company in which public are not incase of a company in which public are not

substantially interestedsubstantially interested• The tax payer is company in which public are not The tax payer is company in which public are not

substantially interestedsubstantially interested

• The loss of such company can be carried forward The loss of such company can be carried forward and set off by the same company subject to and set off by the same company subject to condition the persons beneficially holding condition the persons beneficially holding 51%shares/voting rights ,the same % of shares 51%shares/voting rights ,the same % of shares must be holding both in the year of loss and in the must be holding both in the year of loss and in the year of set-offyear of set-off

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

Case studies Case studies

• X ltd files its return of loss for the X ltd files its return of loss for the assessment year 2011-12 on December 1, assessment year 2011-12 on December 1, 2011.the following data is taken from 2011.the following data is taken from return submitted by the company:return submitted by the company:

• Business loss for the previous year 2009-Business loss for the previous year 2009-10 ( before depreciation & capital 10 ( before depreciation & capital expenditure on scientific research)-expenditure on scientific research)-170000170000

• Depreciation-30,000Depreciation-30,000• Capital exp. for scientific research-Capital exp. for scientific research-

20,00020,000• Short term capital loss-45,000Short term capital loss-45,000

continued• Long term capital gain-10,000Long term capital gain-10,000

• Interest on Bank Deposit – Rs 4,50,000 after deduction Interest on Bank Deposit – Rs 4,50,000 after deduction of TDS @10%of TDS @10%

• Brought forward loss of earlier year which has been Brought forward loss of earlier year which has been returned in pursuance of return filed within the time returned in pursuance of return filed within the time section139(1)section139(1)

• Unabsorbed depreciation pertaining to the assessment Unabsorbed depreciation pertaining to the assessment year 1997-98 & 1998-99 -57000year 1997-98 & 1998-99 -57000

• Business loss of the previous year 2004-05-18000Business loss of the previous year 2004-05-18000

• Capital loss of the previous year 9-10 -35000. Capital loss of the previous year 9-10 -35000.

Compute the taxable income and tax liability for A.Y.2011-Compute the taxable income and tax liability for A.Y.2011-12 12

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