Sunday, August 3, 2014

SET OFF OR CARRY FORWARD AND SET OFF OF LOSSES


INTRODUCTION

If income is one side of the coin, loss is the other side. When a person earns income, he pays tax.However, when he sustains loss, law affords him to have benefit in the form of reducing the said loss from income earned during the subsequent years. Thus, tax liability is reduced at a later date, if loss is sustained. Certain provisions govern the process of carry forward and set off of loss.

This will be discussed on :
1.  Set off of Loss in the Same Year
2.  Carry forward and Set off of Loss in Subsequent Years
  • Basic Conditions for carry forward of loss.
  • Conditions applicable to each Head of Income
As stated in Section 14 of the Act computation of total income is made under certain heads viz. (i) Salaries (ii) Income from House Property (iii) Profits and Gains of Business or Profession (iv) Capital Gains and (v) Income from Other Sources.

In case computation results in to a positive figure, it is “Income.” Likewise, if the computation results into a negative figure, it is ‘Loss”. Therefore, there cannot be loss from the head ‘Salary’. Loss can occur from all the remaining heads.

SET OFF OF LOSS IN THE SAME YEAR

For the purpose of computing total income and charging tax thereon, income from various sources is classified under the following heads :
A.  Salaries
B.  House Property
C.  Profits and Gains of Business or Profession
D.  Capital Gains
E.  Other Sources

These five heads of income are mutually exclusive. If any income falls under one head, it cannot be considered under any other head. Income under each head has to be computed as per provisions under that head. Then, subject to provisions of Set off of Losses (Sec. 70 to Sec. 80) between the heads of income, the income under various heads has to be added to arrive at a Gross Total Income. From this Gross Total Income, deductions under Chapter VIA are to be allowed to arrive at the total income.


In this part, the provisions relating to set off, carry forward and set off of losses are categorised as under
Set off of losses within the same head [Section 70]
Where the net result for any Assessment Year in respect of any source falling under any head of income 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 of income for the Assessment Year.

(1)  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.
(2)  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.
(3)   Where result of the computation made for the Assessment Year in respect of speculative business is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived under a similar computation made for the Assessment Year in respect of speculative business only.
(4)   Where result of the computation made for the Assessment Year in respect of a specified business
as per Section 35AD is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived under a similar computation made for the Assessment Year
in respect of other specified business covered by Section 35AD.
(5)   Where any loss made in the business of owning and maintaining race horses, the assessee shall not be entitled to have the amount of such loss set off against any income except income from the
business of owning and maintaining race horses. 

Set off of losses among different head of income [Section 71]
Where the net result of the computation under any head of income in respect of any Assessment Year
is a loss, the assessee shall be entitled to have such amount of loss set off against his income assessable for that Assessment Year under any other head of income.
Exceptions to provisions of Sections 70 and 71 are as follows:
(a)  Loss from Speculation Business: “Speculation transaction” means a transaction in which a contract for the 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 scripts [Sec. 43(5)]. Loss from speculative transaction, if it is in the nature of business, can be set off only against income of another speculative business.
(b)  Loss under the head Long Term Capital Gains: Long Term Capital Loss arising from transfer of longterm capital assets will be allowed to be set off only against Long Term Capital Gains.
Note:
  1. Loss can be set off against deemed income.
  2. Inter head adjustment is made only when the net income computed under a head is a loss.
  3. The scheme of inter source and inter head adjustment is mandatory.
(c)  Loss from owning and maintaining race horses: Loss from owing and maintaining race horses can be set off only against income of that activity.
(d)  Loss from lottery, card games, races, etc:No expenditure or allowance is allowed from wining
from lotteries, crossword puzzles, card games etc. similarly, no loss from any lottery, card games,
races, etc. is allowed to be set off from the income of such sources. [Sec. 58(4)
(e)  Loss from exempt Income:Loss incurred by an assessee from a source, income from which is
exempt cannot be set off against income from a taxable source.
(f)   Loss from business specified in Section 35AD: Any loss arising from specified business u/s 35AD, cannot be set off against any other income.
(g)   Loss from business: Loss from business and profession including unabsorbed depreciation cannot be set off against Income from Salary.

CARRY FORWARD AND SET OFF OF LOSS IN SUBSEQUENT YEARS

Basic conditions for carry forward of loss
Section 80:loss returns
In order to carry forward loss under section 72, 73, 74 and 74A, return of income to be submitted within the due date as prescribed in Section 139(1). No loss which has not been determined in pursuance of a return filed within the date in accordance with the provisions of Section 139(3) shall be carried forward under the provisions of section.
 
The condition for filing of return in accordance with the provisions of Sec. 139(3) shall not apply to loss from House Property carried forward u/s. 71B and unabsorbed depreciation u/s. 32(2).

Brought forward loss of earlier Assessment Year in accordance with Sec.s 72, 73, 74, 74A can be set off against the income of that Assessment Year and can be carried forward further, even if the return is not filed within the due date specified in Section 139(1) of the Act.
 
CBDT  has  issued  Circular  vide  No.  8  of  2001  dated  16.5.2001  clarifying  that  the  power  has  been delegated to Commissioner to condone delay in filing return and carry forward losses in cases where the claim for loss does not exceed ` 10,000 for each Assessment Year and to Chief Commissioner/Director General upto ` 1 lakh and beyond such limit CBDT will exercise the power.

Conditions applicable to each head  
Sec. 71B: Carry forward and set off of loss from House Property
Where for any Assessment Year the net result of computation under the head “Income from House
Property” is a loss to the assessee and such loss cannot be or is not wholly set off against income from any other 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)  be set off against the income from House Property assessable for that Assessment Year; and
(ii)  the loss, if any, which has not been set off wholly, the amount of loss not so set off, shall be carried forward to the following Assessment Year, not being more than eight Assessment Years immediately succeeding the Assessment Year for which the loss was first computed.
Sec 72A: Carry forward and set off of accumulated loss in Scheme of Amalgamation or Demerger or Business Re- organization.
Where there has been an amalgamation of -
(a)  a company owning an industrial undertaking or a ship or a hotel with another company; or
(b)  a banking company referred to in Clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or
(c)  one or more public sector company or companies engaged in the business of operation of aircraft
with one or more public sector company or companies engaged in similar business.
Accumulated loss and the unabsorbed depreciation of such company shall be deemed to be the
loss of such amalgamated company for the Previous Year in which the Scheme of Amalgamation was
brought into force if the following conditions are satisfied:
1.   The amalgamating company should have been engaged in the business for three years or more.
2.   The amalgamating company should have continuously held at least three-fourths of the book
value of fixed assets for at least two years prior to the date of amalgamation.
3.   The amalgamated company will hold continuously for a period of five years at least three-fourths
of the book value of the fixed assets of the amalgamated company acquired on amalgamation.
4.   The  amalgamated  company  will  continue  the  business  of  the  amalgamated  company  for  a
period of at least 5 years.
5.   The amalgamated company, which has acquired an industrial undertaking of the amalgamated
company by way of amalgamation, shall achieve the level of production of at least 50% of the
installed capacity of the amalgamated industrial undertaking before the end of four years from the
date of amalgamation and continue to maintain the minimum level of production till the end of
five years from the date of amalgamation [this condition may be relaxed by Central Government
on an application made by the amalgamated company].
6.   The amalgamated company shall furnish a certificate in Form 62, duly verified by an accountant,
to the Assessing Officer.

If any of the aforesaid conditions are not fulfilled, then the amount of brought forward business loss or unabsorbed depreciation so set off in any Previous Year in the hands of the Amalgamated Company will be deemed to be the income chargeable to tax, the hands of that Amalgamated Company, for the year in which such conditions are not fulfilled.

In case of Demerger, the amount of set off of the accumulated loss and unabsorbed depreciation, if
any, allowable to the assessee being a resulting company shall be –
(i)   the accumulated loss or unabsorbed depreciation of the demerged company if the whole of
the  amount  of  such  loss  or  unabsorbed  depreciation  is  directly  relatable  to  the  undertakings
transferred to the resulting company; or
(ii)   The amount which bears the same proportion to the accumulated loss or unabsorbed depreciation of the demerged company as the assets of the undertakings transferred to the resulting company bears  to  the  assets  of  the  demerged  company  if  such  accumulated  loss  or  unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company.

Unabsorbed loss can be carried forward for the unexpired period of out of total 8 years. Conditions
specified in Section 72A are applicable to amalgamation only and not to demerger. However, the Central Government may, for the purposes of this section, by notification in the Official Gazette, specify such other conditions as it considers necessary to ensure that the demerger is for genuine business purposes.

In case of Business Re-organisation, set off of the accumulated loss and unabsorbed depreciation, if
any, allowable to the assessee being the successor company for a period of 8 years commencing from
the Previous Year of such business re-organisation.

Sec 72AA: Provision  relating  to  carry  forward  and  set  off  of  accumulated  loss  and  unabsorbed
depreciation allowance in a scheme of amalgamation of banking company in certain cases

Notwithstanding anything contained in Section 72(2)(1B)(i)to (iii) where there has been an amalgamation of a banking company with any other banking institution under a scheme sanctioned and brought into force by the Central Government under Sec 45(7)of Banking Regulation Act , 1949 the accumulated loss and the unabsorbed depreciation of such banking company shall be deemed to be the loss or, as the case may be, allowance for depreciation of such banking institution for the Previous Year in which the scheme of amalgamation was brought into force and other provision of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. In this case conditions u/s 2(1B) or 72A may or may not be satisfied.

For the purposes of this section :
(i)  “Accumulated loss” means so much of the loss of the amalgamating banking company, under
the head “Profits and Gains from Business” (not being a loss sustained in a speculation business)
which such amalgamating banking company, would have been entitled to carry forward and set
off under the provision of Section 72 if the amalgamation had not taken place;
(ii)  “Banking company” shall have the same meaning as assigned to it in Sub-section (15) of Section
45(15) of the Banking Regulation Act, 1949.
(iii)  “Banking institution” shall have the same meaning as assigned to it in Sub-section (15) of Section 45(15) of the Banking Regulation Act, 1949.
(iv)  “Unabsorbed  depreciation”  means  so  much  of  the  allowance  for  depreciation  of  the
amalgamating banking company which remains to be allowed and which would have been
allowed to such banking company if amalgamation had not taken place.

Reverse Merger
One may see that Sec. 72A is an exception of the general rule that the benefit of carry forward of
loss and unabsorbed depreciation allowance is available to the same person who incurred the loss
or  suffered  depreciation.  However,  one  may  also  find  that  Sec.  72D  is  not  available  to  him  as  the entity in which the loss is incurred does not qualify as an industrial undertaking or that some of the conditions  of  Sec.  72D  are  onerous  to  fulfil.  Therefore,  to  get  over  these  problems,  the  concept  of reverse merger gained momentum. Under a normal merger, it is a sick industrial undertaking that is wound  up  and  merged  with  a  healthy  undertaking.  Under  a  reverse  merger,  a  healthy  company is merged with the sick company that has losses and unabsorbed depreciation allowances carried forward. Thus, the profits of the healthy company after amalgamation will be available for set off to the losses and unabsorbed depreciation allowances. The sick company that incurred the losses and suffered depreciation allowance will be the same person as the person who will carry them forward and adjust against the profits. Thus, Sec. 72D will not apply and the purpose of set off of losses and unabsorbed depreciation allowances will still be achieved. Based on facts in given cases the route merger of reverse merger will suit some companies.

Sec. 72AB: Provisions relating to carry forward and set off of accumulated loss and unabsorbed
depreciation allowance in Business Re-organisation of Co-operative Banks

(1)   The assessee, being a successor co-operative bank, shall, in a case where the amalgamationhas
taken  place  during  the  Previous  Year,  be  allowed  to  set  off  the  accumulated  loss  and  the
unabsorbed depreciation, if any, of the predecessor co-operative bank as if the amalgamation
had not taken place, and all the other provisions of this Act relating to set off and carry forward of
loss and allowance for depreciation shall apply accordingly.
(2)   The provisions of this section shall apply if—
(a)  the predecessor co-operative bank—
  • has been engaged in the business of banking for three or more years; and
  • has held at least three-fourths of the book value of fixed assets as on the date of the business re-organisation, continuously for two years prior to the date of business re-organisation;
(b)  the successor co-operative bank—
  • holds  at  least  three-fourths  of  the  book  value  of  fixed  assets  of  the  predecessor  cooperative bank acquired through business re-organisation, continuously for a minimum period of five years immediately succeeding the date of business re-organisation;
  • continues the business of the predecessor co-operative bank for a minimum period of five years from the date of business re-organisation; and
  • fulfils such other conditions as may be prescribed to ensure the revival of the business of the predecessor co-operative bank or to ensure that the business re-organisation is for genuine business purpose.
(3)  The amount of set-off of the accumulated loss and unabsorbed depreciation, if any, allowable to the assessee being a resulting co-operative bank shall be,—
  • the accumulated loss or unabsorbed depreciation of the demerged co-operative bank if the whole of the amount of such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting co-operative bank; or
  • the amount which bears the same proportion to the accumulated loss or unabsorbed depreciation of the demerged co-operative bank as the assets of the undertaking transferred to  the  resulting  co-operative  bank  bears  to  the  assets  of  the  demerged  co-operative bank if such accumulated loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting co-operative bank.
(4)  The Central Government may, for the purposes of this section, by notification in the Official Gazette, specify such other conditions as it considers necessary, other than those prescribed under Subclause (iii) of Clause (b) of Sub-section (2), to ensure that the business re-organisation is for genuine business purposes.
(5)  The  period  commencing  from  the  beginning  of  the  Previous  Year  and  ending  on  the  date
immediately preceding the date of business re-organisation, and the period commencing from
the date of such business re-organisation and ending with the Previous Year shall be deemed to
be two different Previous Years for the purposes of set off and carry forward of loss and allowance
for depreciation.
(6)   In a case where the conditions specified in Sub-section (2) or notified under Sub-section (4) are not complied with, the set off of accumulated loss or unabsorbed depreciation allowed in any Previous Year to the successor co-operative bank shall be deemed to be the income of the successor cooperative bank chargeable to tax for the year in which the conditions are not complied with.

Section 73A: Set of off loss of the specified business (w.e.f A.Y. 2010-11)
With reference to newly inserted Section 35AD (w.e.f A.Y. 2010-11), any loss computed in respect of
the specified business shall not be set off except against profits and gains, if any, of any other specified business. To the extent the loss is unabsorbed the same will be carried forward for set off against profits and gains from any specified business in the following Assessment Year and so on

Section Losses
71B: Brought forward loss from House Property
32(2): Brought forward unabsorbed depreciation
72: Carried forward and set-off of business losses other than speculative business.
73: Losses in speculation business.
73A: Brought forward loss from Specified Business u/s 35AD
74: Losses under the head Capital Gains.
74A: Losses from owning and maintaining race horses.


Special provisions
Section 78(1) :
Where a change has occurred in the constitution of the firm, the firm shall not be entitled to carry
forward and set off so much of the loss proportionate to the share of a retired or deceased partner
remaining unabsorbed. This restriction shall not apply to unabsorbed depreciation.

Change in constitution of the firm for the purpose of this section takes place –
If one or more of the partners cease to be partners due to retirement or death of anyone or more
partners, in such circumstances that one or more of the persons who were partners of the firm before
the change, continue as partner or partners after the change (provided the firm is not dissolved on the
death of any of its partners).
This section does not cover change in constitution of the firm due to change in the profit sharing ratio
or admission of new partners.
Section 78(2) :
Where any person carrying on any Business or Profession has been succeeded in such capacity by
another person otherwise than by inheritance, then the successor cannot have the loss of predecessor
carried forward and set off against his income.
Section 79 :
Losses (other than unabsorbed depreciation) in case of closely held company:
In case of a company in which public are not substantially interested (defined in Sec. 2(18) of the
Act), the unabsorbed business loss relating to any Assessment Year can be carried forward and set off
against the income in a subsequent Assessment Year only if the shares of the company carrying not
less than 51% of the voting power were beneficially held by the same persons both on the last day of
the Previous Year(s) in which the loss claimed to be set off and on the last day of the Previous Year in
which loss was incurred.
Exceptions:
The provisions stated supra shall not apply if —
(a)   the change in the voting power takes place due to the following reasons :
  • the death of a shareholder; or
  • transfer of shares by way of gift to any relative of the shareholder making such gift.
(b)  W.e.f.  AY  2000-01,  this  section  shall  not  apply  to  any  change  in  the  shareholding  of  an  Indian company which is subsidiary of a foreign company arising as a result of amalgamation or demerger of a foreign company subject to the condition that 51% of the shareholders of the amalgamating or demerged foreign company continue to remain the shareholders of the amalgamated or the resulting foreign company.
Notes : Unabsorbed business losses can be carried forward and set off against profits from any business from A.Y. 2000-01. There is no need to continue the same business in which the loss was incurred.

In  this  case,  the  loss  of  financial  year  2012-13  will  not  be  set  off  against  the  profit  of  financial  year 2013-14, since the persons, Bony and Cady, or Bony and Dany or Cady and Dany who hold between them as a pair 51% shares as at the end of financial year 2012-13 do not hold 51% shares at the end of financial year 2013-14.
Order of Priority in carry forward and set-off of losses
Depreciation can be carried forward and set off against the profits from any business in the succeeding Assessment Year upto A.Y. 2001-02. The business in which the loss was incurred need not be continued in that year.
The effect of depreciation and business loss should be given in the following order:
  • Current year’s Depreciation
  • Unabsorbed Business loss
  • Unabsorbed Depreciation
A return of loss is required to be furnished for determining the carry forward of such losses, by the due date prescribed for different assesses under section 139(1) of the Act. (Sec. 80)



Note:
“Horse race” means a horse race upon which wagering or betting may be lawfully made [Explanation
(b) to Sec. 74A]. Thus, where wagering or betting is not lawfully made on race horses, any loss incurred on such betting can neither be set off nor carried forward. Hence, the carried forward loss of ` 2,00,000 cannot be set-off.
Determine income under head of income for the A. Y. 2014-2015
Solution : Aggregation of income under each head of income: A. Y. 2014-2015


Speculation loss cannot be set-off against the income from business profit, though both of them fall
under the same head of income.
Thus, taxable business profits for the Assessment Year 2014-2015 is ` 1,50,000. The speculation loss will be carried forward for future set-off for 4 Assessment Years, immediately succeeding the Assessment Year for which it was first com  puted [Sec. 73(4)].
The time-limit of 4 years is applicable from the Assessment Year 2015-2016 and subsequent year.
Illustration 6. D has earned income of ` 5,60,000 from speculation business during the PY 2013-2014. However, he has suffered losses in business and profession ` 3,20,000 and ` 1,70,000, respectively during the same period. Determine his income from business profession for the Assessment Year 2014-2015.
Solution : Income from Business and Profession for the AY 2014-2015 :
Note :
1.  The unabsorbed loss of ` 13,000 (80,000-67,000) of Textile business can be carried forward to A.Y. 2015-16 for setoff u/s. 72, even though the business is discontinued.
2.  The unabsorbed depreciation of ` 15,000 is eligible for set off against any income other than salary
income. Since, Gross Total Income contains the balance of Income from Salary only, unabsorbed
depreciation cannot be adjusted, and hence, carried forward for adjustment in the subsequent
years.
Illustration 8:An assessee has filed a belated return showing a business loss. What is the remedy available to him for carry forward and set off of the said loss?
AG Ltd. filed its return of loss for the Assessment Year 2014-2015 on 10.01.2015 beyond the time prescribed u/s 139(3) declaring a total loss of ` 12,00,000. It approaches you for your advice regarding the course of action to be taken to secure the benefit of carry forward of the business loss for set off against future profits. Advise the company suitably.
Solution :
A.  CBDT’s Powers:CBDT has the powers to condone the delay in filing return in cases having claim of carry forward of losses. [ Associated Electro Ceramics vs. CBDT 201 ITR 501 ( Kar.)]
B.  Monetary limits prescribed for the condonation of delay are as under – [ Cir. No. 8/2001 dt. 16.5.2001

C.  Analysis and conclusion: Here, since the loss of AG Ltd. is ` 12,00,000, the authority empowered to condone the delay is CBDT. Hence, AG Ltd. has to file a condonation petition to the CBDT to carry forward the business loss.




0 comments:

Post a Comment

Copyright © 2015 Accounting & Taxation All Right Reserved
Subscribe by Email Get Free Updates
Don't Forget To Join US Our Community
×
blogger