Abhishek Jhanwar

Roll No.24

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)

Inter-source set off - 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 35AD (Sec. 73A) (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.

ExampleX 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

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. [1975] 99 ITR 118 (SC).

Rules

Carry Forward and Set Off of Loss From House Property (Sec. 71B)

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 H1 (98-99) 30,000 H2 (2004-05) 35,000

98-99 H1 loss will be ignored.

Loss of 04-05 will be adjusted with 30,000.

Therefore 5,000 will be carried forward.

ExampleX has two non speculative businesses A & B.

Besides he has income from house 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 (290,000-70,000) 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. House Property Losses

2. Business Loss

3. Speculation Loss

4. Capital Loss

5. 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)].

Order of set off of business losses from business income

CY Depreciation [59 ITR 555 (SC)] CY Capital Exp on Scientific Research and CY Family Planning B/F Business Loss [Due to Sec.72(2)]Unabsorbed DepreciationUnabsorbed Capital Expenditure on Scientific ResearchUnabsorbed Expenditure on Family Planning

Return of loss

Provisions related to Business Losses

Losses incurred in following case can be adjusted even if the person is not same for set off

Inheritance (Unabsorbed Depreciation not allowed) Amalgamation Succession of proprietary concern or firm by a Company Demerger

Period of Carry forward of 8 years, in following , carry forward timing would be indefinite

Unabsorbed depreciation Unabsorbed capital expenditure of scientific research Unabsorbed expenditure on family planning

Set off incase of Change in Constitution [Sec. 72A]

Unabsorbed business loss can be carry forward up to 8 years from the year of amalgamation/ demerger/ change in constitution in case of :

1. Amalgamating to Amalgamated

2. Demerged to Resulting Company

3. Firm or Propriety Concern to Successor Company

4. Closely held Company to LLP

Conditions to be Satisfied for Carry Forward in case of Amalgamation

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 <60L 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.

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

Capital loss computed by assessee with indexation cost can be setoff against long term capital gains computed without indexation

Loss from the Activity of Owning and Maintaining Race Horse.. (Sec. 74A)

A person incurring loss from such activity means expensed forMaintaining 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. Loss from racing

activity can be set off against Profit from sale of horses.

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

Provisions in briefType 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.

NON SPECULATION BUSINESS LOSS:

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

Thank You