Set off of losses

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CA Sanjay Bansal
Bansal, Bansal & Co.
Chartered Accountants
[email protected]
11/07/2012
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)
•
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.
Example
X 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).
Decided cases on set off losses in CY
income
• Benefits u/s 70 can be claimed even in the case of clubbing of income u/s
64, ex. the loss of an individual is eligible for set off against clubbed
income of minor child.CIT v. JH Gotla [1985] 156 ITR 323 (SC).
• If there is profit from one source of income and loss from another, the
assessee has no option but to set off the loss against such profits if it is
permissible under section 70. G. Atherton & Co. v CIT [1989] Tax LR 13
(Cal) AND CIT v. Milling Tdg Co P Ltd [1994] 76 Taxman 389 (Guj)
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
(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.
H2
Example
X 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 (290,00070,000) 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.
2.
3.
4.
5.
House Property Losses
Business Loss
Speculation Loss
Capital Loss
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 Depreciation
Unabsorbed Capital Expenditure on Scientific
Research
Unabsorbed 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.
2.
3.
4.
Amalgamating to Amalgamated
Demerged to Resulting Company
Firm or Propriety Concern to Successor Company
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.
Speculation Business
Sec 43(5)
Transaction
involving purchase
or sale of any
commodity
Periodically settled
Actual delivery
Transfer of
commodity or
scripts
Speculation Business
• Fiction created by Explanation to Sec. 73
• Delivery based loss on shares also speculation. Paharpur
Cooling Towers Ltd v. ACIT (2011) 52DTR41 (Cal).
• If the money lending business was included in main object,
share loss not speculation. CIT v. Frontline Securities Ltd.
(2011) 50 DTR 337 (Del.)
Speculation Business
• Test of majority of funds employed for inv activities for
deciding principal business ITO v. Bijay Paper Traders & Inv Ltd
(2010) 38 SOT 578 (Del) (ITAT).
• Loss even on a/c of valuation of stock of shares, is speculation
loss. Prasad Agencies P Ltd. (2009) 213 Taxman 571 (Bom.)
• Units of MF can not be treated as shares for the purpose of
Explanation to Sec 73. Apollo Tyres v. CIT. [2002] 255 ITR 273
(SC)
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. Keshav S. Phansalkar (2009) 32 DTR 454 (Mum)
(ITAT) and Mohanlal N. Shah HUF (2008) 26 SOT 380 (Mum)
Loss from the Activity of Owning and
Maintaining Race Horse.. (Sec. 74A)
 A person incurring loss from such activity means expensed for
 Maintaining 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. [2001] 250 ITR 177 (Mad).
 Loss from racing activity can be set off against Profit from sale of
horses. CIT v. Mrs. Sunita Kumar [1994] 208 ITR 807 (Cal.)
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
• Dy. CIT v. Select Holiday Resorts P Ltd (2011) 52 DTR 14 (Del)
(ITAT).
Special point to be consider
• Where the losses incurred are not set off against the income
of the immediately succeeding year/years as the case may be,
it was held that it can not be set off in later date (Tyresoles
(India) V CIT)
• For Business, Speculation and Capital Loss C/F, filing of return
within due date is mandatory. Sec. 80 r.w.s. 139(3).
• If belated, no c/f even if assessment u/s 143(3). Joginder Paul
HUF v CIT (2011) 239 CTR 566 (P&H).
Special point to be consider
• Stock stored in State warehousing corp was destroyed by fire
in the 1978. Suit filed for reimbursement of loss. Suit
dismissed in 1982. Loss was allowable in the year 1983-84.
New Diwan Oil Mills vs. CIT (2010) 328 ITR 432 (P&H).
• While computing deduction under section 80HHA with regard
to income derived from industrial u/t, loss from a non
industrial unit, in terms of section 80AB and section 71, has to
be adjusted first. CIT vs. Mentha & Allied Products (2010) 326
ITR 297 / 47 DTR 284 (All)
Special point to be consider
• AO must allow set off even if it is not claimed by assessee. CIT
v. Mahalakshmi Sugar Mills Co. Ltd [1986] 160 ITR 920 (SC).
• When there is nothing given in Act regarding mode of set off,
the Dept should adopt an approach beneficial to the assessee.
Circular No. 26 dated 7-7-1955 [F.No. 4(53)-IT/54].
• Before giving effect to Sec 72 and Sec 74, set off u/s 71 shall
be made first. Circular No. 587 dated 11-12-1990.
Provisions in brief
Type 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.
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
NON SPECULATION BUSINESS LOSS:
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