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Set off of Loss & Carry Forward of Losses - Taxation

Carry Forward & Set off of Losses of Past Years

Section 71B. carry forward & adjustment of brought forward loss from house property

1. Brought forward house property loss can be set off only against profit of house property.

2. The loss is allowed to be carried forward for 8 AY.

3. Section 80 is not applicable meaning thereby a house property loss can be carry forward even if return of loss is not filed in time.

P1: (A) Compute GTI and carry forward of loss from house property for the AY 2017-18 assuming that return of loss for the AY 2014-15 was not filed.

	Case 1	Case 2	Case 3	Case 4
Income from Salary	1,000	20,000	10,000	21,000
Income from House Property
• House 1	3,000	6,000	2,000	(10,000)
• House 2	(1,000)	(8,000)	(13,000)	4,000
Brought forward HP loss of AY 2014-15	(500)	(1,000)	-	(18,000)

(B) What if in Case 1 if brought forward house property loss of AY 2014-15 is Rs 3,500.

Ans: (A) (1) 2,500; nil; (2) 18,000; 1,000; (3) nil; 1,000; (4) 15,000; 18,000 (B) 1,000; 1,500.

Solution : case 1

Computation of Gross Total Income
Income from Salary		1,000
Income from House Property [3,000 - 1,000]	2,000
Less : Brought forward loss from house property	(500)	1.500
Gross total income		2,500

Solution : case 2

Computation of Gross Total Income
Income from Salary	20,000
Income from House Property [6,000 - 8,000]	(2,000)
gross total income	18,000

Note : Since brought forward loss of house property can be adjusted only against income from house property, therefore loss of Rs 1,000 shall be carried forward to next AY.

Section 72. Carry forward and adjustment of brought forward business losses

1. Brought forward business loss (non-speculation ) can be adjusted against both business profit and speculation profit. However in case where shares are held as stock in trade dividend from such shares shall be treated under the head ‘Business’. It means brought forward business loss can be set off against dividend on shares if shares are held as stock in trade.

	case 1	case 2
Dividend from Foreign Company. Shares held as stock in trade	20,000	20,000
B/f loss under the head Business	(15,000)	(25,000)
Other Sources	5,000	NA
Business loss	NA	(5,000)

2. The loss can be carried forward for 8 AY.

3. Section 80. The return of loss should be filed on or before the due date of furnishing of return otherwise right to carry forward of loss is lost.

4. The business in respect of which a loss is incurred need not be continued. It means even if business is discontinued loss can be set off and carry forward.

5. Loss can be set off only by that assessee who has incurred the loss. But it has 6 exceptions as under :

(a) 72A. Accumulated business loss of amalgamating company can be carried forward and set off by amalgamated company. [X + Y = X]

(b) 72A. Accumulated business loss of demerged company can be carried forward and set off by resulting company. [X = X - Y]

(d) 72A. Conversion of firm into a company. [Firm to Company]

(e)72A. Conversion of Private limited Company to LLP or Unlisted Company to LLP. (Limited Liability Partnership). [Pvt to LLP] [Unlisted Company to LLP]

(f) 78(2). Losses of business acquired on inheritance. Father dies and son inherits the business then son can set off the business loss.

Section 73. Carry forward & adjustment of brought forward speculation loss

1. Brought forward speculation loss can be set off only against speculation profit.

2. The loss can be carried forward for 4 AY.

3. Section 80. The return of loss should be filed in time otherwise right to carry forward of losses will be lost.

4. The business in respect of which a loss is incurred need not be continued.

5. Loss can be set off only by that assessee who has incurred the loss. No exception.

Section 74. Carry forward & adjustment of brought forward loss under the head capital gain.

1. Brought forward LTCL can be set off only against LTCG but never against STCG. However brought forward STCL can be set off both from STCG and LTCG.

2. The loss can be carried forward for 8 AY.

3. Section 80. The return of loss should be filed in time otherwise right to carry forward of losses will be lost.

Section 74a. Carry forward and adjustment of brought forward losses in owning and maintaining race horses.

1. Brought forward losses from owning and maintenance of race horses are allowed to be set off only against income of such business.

2. The loss can be carried forward for 4 AY.

3. Section 80. The return of loss should be filed in time otherwise right to carry forward of losses will be lost.

4. The business in respect of which a loss is incurred should be continued.

5. Loss can be set off only by that assessee who has incurred the loss. No exception.

Section 32(2). Carry forward & set off of unabsorbed depreciation.

	Case 1	Case 2	Case 3	Case 4
Profit from business before depreciation	40,000	40,000	nil	(10,000)
Current Depreciation u/s 32(1)	(10.000)	(60.000)	(2,000)	(15,000)
Profit from business	30,000	nil	nil	nil
Business loss u/s 72	nil	nil	nil	(10,000)
Unabsorbed Depreciation u/s 32(2)	nil	(20,000)	(2,000)	(15,000)

Meaning of unabsorbed depreciation:

1. It should be distinguished from current year depreciation which is dealt in section 32(1). Whereas unabsorbed depreciation is dealt under section 32(2). It is also known as brought forward depreciation.

2. The unabsorbed depreciation simply means depreciation which is not absorbed by the profit of the business.

3. Do remember there can be no loss under the head profit from business because of depreciation.

Rules for set off of Unabsorbed Depreciation :

1. The unabsorbed depreciation can be set off with any head’s of income except casual income and salary income. But it shall be first set off with Business Income.

2. The unabsorbed depreciation can be carried forward for indefinite period.

3. The return of loss even if not filed in time, unabsorbed depreciation is allowed to be carried forward.

4. The business in respect of which there is unabsorbed depreciation need not be continued.

5. Loss can be set off only by that assessee who has incurred the loss with 6 exceptions as specified in section 72A / 78(2).

Priority to set off Losses

1. Section 35, 36(1)(ix). Current scientific research capital expenditure and family planning promotion capital expenditure.

2. section 32(1). current depreciation.

3. section 72. Brought forward business losses.

4. Section 36(1)(ix). Unabsorbed family planning promotion capital expenditure.

5. section 32(2). unabsorbed depreciation.

6. Section 35(4). Unabsorbed scientific research capital expenditure.

P1: Mohan Singh has presented the following particulars in respect of his income of last 3 years : Calculate his gross total income for different assessment years.

assessment year	Profit or loss before depreciation	Depreciation for the year
2014-15	(5,00,000)	2,00,000
2015-16	4,00,000	3,00,000
2016-17	6,00,000	1,50,000

Ans: Nil; Nil; Nil, C.f. 32(2) 1,50,000

P2: From the following particulars compute the total income for each of the following previous years of Mr. Steve Irwin a Crocodile Hunter.

Income from house property	15,000
Loss in paper industry	15,000
Loss in electronic business	7,500

Depreciation on assets used in paper industry	6,000
Income from house property	(5,000)
Profit from paper industry	13,000

Depreciation for the year	3,000
Income from house property	15,000
Profit from paper industry	8,000

Loss in electronic business

(Discontinued at the end of the year)

22,500

Depreciation for the year

1,500

Profit from paper industry

15,000

Depreciation for the year	1,500
Loss from diamond business	4,500

Ans: nil; nil; nil; nil; Rs 500 unabsorbed depreciation shall be carried forward to PY 5 assignment

Assignment

P1: The following particulars of the income of Mr. ‘X’ for the financial year 2016-17 are available :

A. Income from House property : 28,000

B. Income from Profits & Gains from business

(i) Profits from ‘X’ business 40,000

(ii) Loss from ‘Y’ business (–) 50,000

(iii) Profits from speculation in silver 40,000

(iv) Loss from speculation in gold (–) 10,000

C. Capital gains :

(i) Long-term Capital gains 30,000

(ii) Short-term Capital loss (–) 10,000

D. Income from other sources :

(i) Loss in Card games (–) 1,000

(ii) Loss incurred in Mumbai from the activity of owning and maintaining horses (–) 40,000

(iii) Profit earned in Mumbai from the activity of owning and maintaining horses (+) 40,000

(iv) Dividend from Indian Companies (Gross) 10,000

The following losses have been carried forward by Mr. ‘X’ :

(a) Loss under the head Long-term Capital Gains from the Assessment Year 2011-12. 18,000

(b) Loss from speculation in silver from the assessment year 2013-14.

Speculation business was discontinued in the Assessment year 2014-15. 25,000

Compute the gross total income of Mr. ‘X’ for the Assessment Year 2017-18.

Ans: 30,000.

P2: M/s. D.L. Ltd. filed its return of income for assessment year 2017-18 on 15-12-2017. From the information given below, compute its income/loss and indicate the period upto which loss, if any, can be carried forward :

1. Business loss (1,00,000)

2. Income from speculation business 30,000

3. Depreciation of current year 20,000

4. Short-term capital loss (50,000)

5. Long-term capital gain 50,000

6. Income from Other Sources 30,000

7. Business loss brought forward from A.Y. 2013-14 (30,000)

8. Unabsorbed depreciation of A.Ys. 2013-14 and 2014-15 (40,000)

9. Long-term capital loss brought forward from A.Y. 2014-15 (10,000)

Ans: Total Income Nil; Business loss of Rs 40,000 of the AY 2017-18 shall not be carried forward since return of income not filed in time. However unabsorbed depreciation of Rs 20,000 shall be carried forward. Other losses which can be carried forward are Business Loss 30,000; Unabsorbed depreciation of A.Ys. 2013-14; 2014-15 and 2017-18. Long-term capital loss brought forward from A.Y. 2015-16 Rs (10,000).

P3: Indicate the order in which the following amounts have to be set-off from the current years’ (AY 2017-18) income of Rs 25 lakhs, which includes Rs 5 lakhs as income from ‘Other sources’ :

(i) Brought forward business loss : Rs 1.5 lacs for AY 2014-15; Rs 2.5 lacs for AY 2015-16 and Rs 8 lacs for AY 2016-17, all assessed figures.

(ii) Unabsorbed depreciation for the same three years at Rs 5 lakhs, Rs 4 lakhs and Rs 3 lakhs respectively.

(iii) Current depreciation Rs 2 lakhs has to be allowed.

(iv) Rs 7 lakhs representing speculation loss for AY 2015-16. ans: Business Income (20–2–1.5–2.5–8–6 = nil). Other Sources (5–5= 0). Total Income =0 Carry forward 32(2) 1 lakhs. 7 lakhs.

EXTRA TOPICS

Section 72a(1): set off of losses in case of Amalgamation

The amalgamating company satisfies following conditions:

1. Where there has been an amalgamation of a company owning an industrial undertaking

2. The amalgamating company engaged in the business, for 3 years or more.

3. It has held continuously as on the date of amalgamation at least 75% of the book-value of fixed assets held by it 2 years prior to the date of amalgamation.

The amalgamated company satisfies following conditions:

1. continues to hold at least 75% in the book value of fixed assets of the amalgamating company for a minimum period of 5 years from the date of amalgamation.

2. continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation;

3. A report of CA is furnished.

then

4. Business loss u/s 72 and unabsorbed depreciation u/s 32(2) of the amalgamating company is treated as loss of amalgamated company in the year of amalgamation. [Fresh period of 8 years shall be allowed]

Section 78. losses of Retiring Partner

(1) Where a partner retires or has deceased then the firm cannot set off so much of the loss proportionate to the share of a retired or deceased partner. (Not applicable to unabsorbed depreciation)

(2) Where any person has succeeded by way of inheritance, then such person can carried forward and set off the loss against his income.

Section 79. losses of closely held Companies

1. Provisions of section 79 is applicable to ‘company in which the public are not substantially interested’ i.e. only to closely held companies. (Private limited company or unlisted company).

2. Such closely held company incurs a loss in any year.

3.. The company wants to carry forward and set off that loss in subsequent year.

4. The company can carry forward and set off such loss only if on the last day of the previous year in which loss is incurred and last day of the previous year in which loss is set off, atleast 51% of the voting power were beneficially held by same persons.

5. Provisions of section 79 apply to all losses except unabsorbed depreciation. It means even if there is change in voting power unabsorbed depreciation can be carried forward and set off.

6. If the conditions of 51% is not satisfied then also loss is allowed to be carried forward and set off if there is a change in voting power consequent to following situations:

(a) On the death of a shareholder; or

(b) On account of transfer of shares by way of gifts to any relative of the shareholder making such gift.

The document Set off of Loss & Carry Forward of Losses (Part -2) -Taxation | Income Tax for assessment (Inter Level) is a part of the Taxation Course Income Tax for assessment (Inter Level).

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FAQs on Set off of Loss & Carry Forward of Losses (Part -2) -Taxation - Income Tax for assessment (Inter Level)

1. What is the concept of loss carry forward and how does it work?

Ans. Loss carry forward refers to the provision in taxation where a taxpayer can offset their losses from one year against future profits. This means that if a taxpayer incurs a loss in a particular year, they can carry forward that loss and deduct it from their taxable income in the following years. This helps to mitigate the impact of losses on the taxpayer's overall tax liability.

2. Can all types of losses be carried forward?

Ans. No, not all types of losses can be carried forward. In most tax jurisdictions, only certain types of losses, such as business losses or capital losses, are eligible for carry forward. Personal losses or losses from non-business activities may not be allowed to be carried forward. It is important to consult the specific tax laws of the jurisdiction to determine which types of losses are eligible for carry forward.

3. Is there a time limit for carrying forward losses?

Ans. Yes, there is usually a time limit for carrying forward losses. In many jurisdictions, the allowable time period for carrying forward losses is typically around 3 to 5 years. This means that the taxpayer must utilize the carried-forward losses within this time frame or else they may expire and become ineligible for offsetting against future profits. It is advisable for taxpayers to keep track of their carried-forward losses and plan their tax strategies accordingly.

4. Can losses be carried forward indefinitely?

Ans. In some cases, losses can be carried forward indefinitely. However, this depends on the tax laws of the specific jurisdiction. Some jurisdictions may impose a time limit, as mentioned earlier, while others may allow losses to be carried forward without any expiration date. It is important for taxpayers to be aware of the rules governing loss carry forward in their jurisdiction to maximize the benefits of this provision.

5. Are there any limitations or restrictions on the utilization of carried-forward losses?

Ans. Yes, there may be limitations or restrictions on the utilization of carried-forward losses. For example, some jurisdictions impose a cap on the amount of losses that can be offset against future profits in a given year. This means that even if a taxpayer has a significant amount of carried-forward losses, they may only be able to utilize a portion of these losses in a particular year. Additionally, certain tax planning strategies or changes in ownership of a business may impact the utilization of carried-forward losses. It is advisable to seek professional tax advice to navigate these limitations and restrictions effectively.

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