Set-off and Carry Forward of Losses -...

Set-off and Carry Forward of Losses

CA Final Paper 7 Direct Tax Laws, Chapter 10 CA. Shekhar Sane

1

Learning Objectives

2

Income includes “loss” and therefore, it is important to learn various provisions under heads of income for enabling assessee to carry forward and set-off in the Previous Year as well as in future.

Learn “inter source adjustment” / “intra-head adjustment” and “order of set-off”

Learn limitations for number of years, for which losses can be carried forward and set-off.

Learn difference between “business loss” and “depreciation loss”

Learning Objectives

3

Learn limitations for set-off of losses from “Speculative Activities” activities of “Owning and maintaining race horses” and “ Specified business”

Learn provisions in special circumstances like :

• Closely held company • Change in constitution of firm • Succession of business other wise than inheritance • Amalgamation • Demerger / Merger etc. • Losses from discontinued business

Important Sections

4

Section 70 • Inter Source

Adjustments and Exceptions

Section 71 • Inter Head

Adjustment and Exceptions

Sections

5

Section Particulars

71 B Loss from House Property

72 Loss from Business Profession

73 Speculation Loss 73 A Loss From Specified Business 74 Loss under Capital Gains 74 A Loss from activity of owning and maintaining race

horses

Sections - 2

6

Section Particulars

72 A Loss of amalgamating company / demerged company / firm or proprietary concern / Limited Liability Partnership

72 AA Loss of Banking Company

72 AB Loss from business reorganization of co-operative banks

78 Change in constitution and succession – Loss

79 Closely held company – Loss 80 Filing of loss returns Section 139 (3)

Section 70

7

Set off of loss from one source against income from another source under the same head of income

Where net result of computation for any Assessment Year in respect of any source

of income falling under any head of income is loss, the assessee shall be

entitled to set-off against his income from any other source under the same head.

Section 70: Exceptions

8

• Loss from speculative business Section 73

• Loss from specified business u/s 35 AD Section 73A

• Long term capital loss Section 74 • Loss from the activity of owning and

maintaining race horses Section 74 A

Section 71

9

Set off of loss from one head against income from another

Where net result of computation for any Assessment Year in respect of any head of income

is loss, the assessee shall be entitled to set-off against his income from any other head of income.

Section 71 Exceptions

10

• Loss under Profits and Gainst of Business or Profession against Income From Salaries Section 71(2A)

• Loss from speculative business Section 73

• Loss from specified business u/s 35 AD Section 73A

• Long term capital loss Section 74

• Loss from the activity of owning and maintaining race horses Section 74A

Section 71B-Loss from House Property

11

Loss from house property during the Previous Year can be set-off by following

principle of “inter source adjustment” i.e. if there is taxable income from one source and “loss” from another source then such loss can be set-off against such taxable

income under the same head.

In the same Previous Year loss from house property to the extent not set-off as above, it can be set-off against any head of income, to the extent it

is not set-off.


12

Particulars Amount in INR

Inter Source Adjustment Example :

Resultant loss can be set-off against taxable income under any other head of income during the Previous Year.

Income From House Property – I

(120,000.00)

Income From House Property – II

80,000.00

Resultant Loss (40,000.00)


13

In the subsequent Assessment Years, if after adjustment against other heads of

income “loss” still remains then ( i.e. unabsorbed loss ) then, it can be carried

forward and set-off only against income from house property in the

subsequent Assessment Years.

Loss can be carried forward and set-off can be taken for a period of 8 subsequent Assessment Years.


14

In above case, if loss of Rs.40,000 does not get absorbed by other heads of income, then in all subsequent AY it can be set-off only against “Income From House Property”.

Section 72 - Loss under the head “ Profits and Gains of business or profession”

15

Loss can be carried forward and set off even if the business in respect of which is was incurred has been discontinued.

Carried forward Unabsorbed Depreciation can be set-off only after setting off brought forward loss.

Unabsorbed Loss can be carried forward and set-off for a period of 8 A.Y.

Can be carried forward and set-off only against income from business or profession.


16

Loss can be carried forward and set off even if the business in respect of which it was incurred has been discontinued.

Unabsorbed loss under the head “Profits and Gains of Business or profession” other than “speculation business

loss” shall be carried forward and set-off only against income from business or profession for 8 subsequent

Assessment Years.


17

Carried forward Unabsorbed Depreciation can be set-off for an unlimited number of Assessment

Years.

It can be inferred that, an assesses can determine “order of set-off of carry forward of losses” which is beneficial to the tax payer, in the absence of any

specific provision to the contrary.

CIT v. Vegetable

Products Ltd. ( 1973) 88 ITR 192 [SC]

Section 72 - Loss under the head “Profits and Gains of business or profession”

18

Thus, an assesses can set-off carry forward of “business losses” first as there is a restriction of 8 Assessment Years and then “unabsorbed depreciation” can be set-off.

Section 73 – Speculation Business Loss

19

Can be carried forward and setoff only for a period of 4 A.Y immediately succeeding the A.Y for which the loss was first

computed.

Unabsorbed Speculation Loss can be carried forward and set-off against income from any speculation business.

Speculation Business : Purchase and Sale of Shares of Other Companies.

Section 73 – Speculation Business Loss

20

Please note that Sec 73 does not apply to shares acquired as an investment. It applies

when shares are held as Stock-in-trade.

Loss from the activity of trading in derivatives carried out in a recognized stock is not to be treated as

speculative loss, but treated as “Loss From Business or Profession” [Also refer Sec.43 (5)]

Section 73A – Carried Forward & Set off of losses by Specified Business

21

Can be carried forward and setoff for an indefinite period.

Unabsorbed Loss can be carried forward and set-off against profits of such

specified business.

Section 73A – Carried Forward & Set off of losses by Specified Business

22

100% Deduction Capital Expenditure

Deduction is available for Capital Expenditure incurred other than acquisition of land, goodwill and financial instrument. Needless to say 100 % deduction is available for revenue expenditure.

If incurred prior to commencement of

the operations

Deduction in the year of commencement of

businesss

Specified Business – Sec 35AD

23

Setting up and operating a cold chain facility (01-04-2009)

Setting up and operating a warehousing facility for storage of agricultural produce (01-04-2009)

Laying and operating a cross-country (i) natural gas or (ii) crude or (iii) petroleum oil pipeline network for distribution, including storage facility being an integral part of such network(01-04-2009), Natural gas pipeline (01-04-2007)

Building and operating a new hotel in India of two star or above category as classified by CG (01-04-2010)


24

Building and operating a new hospital in India with at least 100 beds for patients (01-04-2010)

Developing and building a housing project under the scheme for slum development or rehabilitation framed by Central / State Govt. and notified by CBDT in accordance with prescribed guidelines (01-04-10)

Business in the nature of developing & building a housing project under a scheme for affordable housing framed by the Govt.s & notified by CBDT (01-04-2011)

Business of producing fertilizer (01-04-2011)


25

Setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962 (1-4-2012)

Bee-keeping and production of honey & beeswax (1-4-2012)

Setting up and operating a warehouse facility for storage of sugar (1-4-2012)

Section 74 – Loss under the head “Capital Gains”

26

Please note that Long Term Capital Gain on Sale of any Listed Shares in Stock Exchange is exempt u/s. 10(38). Therefore, Loss from such transaction shall not be

eligible for set-off or carry forward.

Short and Long Term Loss can be carried forward and setoff within 8 A.Y.

Long Term Loss can be carried forward and set-off against Long Term Capital Gains.

Short Term Loss can be carried forward and set-off against any income assessable under Capital Gains.

Section 74A – Loss from the activity of owning and maintaining race horses

27

Where there is a Stake Money : Loss = Expenditure incurred for maintaining such horses in excess of such

stake.

Where there is no Stake Money : Loss = Expenditure incurred for maintaining such horses

Loss from “Activity of Owning and Maintaining Race Horses” means

Section 74A – Loss from the activity of owning and maintaining race horses

28

Loss can be carried forward and setoff within 4 A.Y. from the end of of the assessment year in which the loss is first computed.

Loss can be carried forward and set-off only against income from such activity in any

subsequent year.

Sec 72A – Special Provisions in case of Amalgamation / demeger / conversion of firm or proprietary concern to Company / conversion of

private or unlisted public co. to LLP

29

Section 72A - Amalgamation

30

Unabsorbed losses and

depreciation of amalgamating

company

Deemed to be the loss or unabsorbed depreciation of

amalgamated co. for the P.Y. in which amalgamation

was effected.

Section 72A - Amalgamation Applicability of the section

31

Amalgamating Company Amalgamated Company 1 Company engaged in

Owning an industrial undertaking / a ship / a hotel

Any another Company

2 A public sector company engaged in the business of operation of aircraft

Another public sector Company engaged in the similar business

3 A banking company Specified bank (SBI or its subsidiary)

32

Section 72A(1)

Conditions to be satisfied by the amalgamating Co.

The co. has been engaged in the business for 3 or more years in which the loss occurred or depreciation remains unabsorbed;

The co. has held continuously as on the date of amalgamation at least 3/4th of the book value of fixed assets held by it 2 years prior to the amalgamation date.

33

Section 72A(2) Conditions to be satisfied by the amalgamated

Co.

a. It should hold for at least 5 years from the amalgamation date at least 3/4th of the book value of fixed assets acquired in the scheme.

b. The same business should be continued for at least 5 years. c. i) The Co. shall achieve the level of production of at least 50% of

the installed capacity before 4 years & continue to maintain such level till the end of 5 years

ii) The co. shall furnish to the AO a certificate in form 62 verified by a CA in this regard.

Section 72A - Demerger

34

Unabsorbed losses of demerged

company directly relatable to the undertakings transferred

Shall be allowed to be carried

forward & set off for the unexpired

period in the hands of the resulting Co.

Unabsorbed depreciation shall be carried forward and set off indefinitely

Section 72A - Demerger

35

When not directly relatable

to the undertaking transferred

Shall be apportioned between the 2

companies in the same proportion of the assets retained

and transferred.

Section 72A – Conversion of Firm / proprietory concern into company

36


depreciation of predecessor

firm / proprietary

Deemed to be the loss or unabsorbed depreciation of successor co. for the P.Y. in

which business reorganization is effected if

such succession is in accordance with sections

47(xiii) & 47(xiv)

Unabsorbed business loss - for further 8 years Unabsorbed depreciation - for indefinite period

Section 72A – Conversion of Pvt / unlisted public Co. into LLP

37


depreciation of predecessor

Company

Deemed loss or unabsorbed depreciation of successor LLP. for the P.Y.

in which the conversion was taken place if such

conversion is in accordance with section

47(xiiib)

Unabsorbed business loss - for further 8 years Unabsorbed depreciation - for indefinite period

Section 72A

38

If the conditions led down in respective sub-sections are not complied with, the set off of

loss or allowance of depreciation made in any P.Y. in the hands of the Co. shall be deemed to

be the income of it chargeable to tax for the year in which such conditions are not complied

with.

Sec 72AA - Amalgamation of banking company with a banking

institution

39

Sec 72AA

40


depreciation of amalgamating

banking Company

Deemed to be the loss or unabsorbed

depreciation of the amalgamated banking

institution.

Where the scheme is sanctioned by the Central Govt. u/s 45(7) of the Banking Regulation Act

Difference between 72A & 72AA

41

Sec 72A Sec 72AA It deals with the amalgamation of banking co. with State Bank of India or any of its subsidiaries.

It deals with the amalgamation of a banking company with any other banking company

Sec 72AB – Business Reorganisation – Co-operative Banks

42

Sec 72AB

43

Unabsorbed losses of

predecessor co-operative Bank

Shall be allowed to be carried

forward & set off for the unexpired

period in the hands of the

successor co-operative ank

Unabsorbed depreciation shall be carried forward and set off indefinitely

Sec 72AB

44

Conditions to be satisfied by the predecessor co-operative bank

a) It is engaged in the business of banking for 3 or more years; and

b) It has held continuously as on the date of business reorganization at least 3/4th of the book value of fixed assets held by it 2 years prior to the date of business reorganization.

Sec 72AB

45

Conditions to be satisfied by the successor co-operative bank

a. It holds for at least 5 years from the reorganisation date at least 3/4th of the book value of fixed assets acquired in the scheme;

b. The same business is continued for at least 5 years; and

c. Fulfils such other conditions to ensure the business reorganization is for genuine purpose.

Sec 72AB

46

If any of the above conditions are not complied with, the set off of loss or allowance of

depreciation made in any P.Y. in the hands of the successor bank shall be deemed to be the

income of it chargeable to tax for the year in which such conditions are not complied with.

Sec 78 – Change in constitution of a firm

47

The loss attributable to the share of a retired or deceased partner remaining unabsorbed shall not be allowed to be

carried forward by the firm.

This restriction shall not apply to unabsorbed depreciation.

Sec 78 – Succession of business

48

The successor of a business or profession cannot have the loss of predecessor carried forward and

set off against his income where he has succeeded otherwise than by inheritance.

Sec 78 – Succession of business

49

Where the business is succeeded by inheritance, the legal heirs (assessable as BOI) are entitled to the

benefit of the loss of the predecessor.

CIT vs. Madhukant M. Mehta, (2001) 247 ITR 805

(SC)

Even if the legal heirs constitute themselves as a partnership firm, the

benefit of carry forward & set off of loss of predecessor should be made

available to the firm.

Sec 79 – Losses in case of closely held Company

50

Where the public is not substantially interested

Unabsorbed business loss relating to any A.Y. can be carried forward & set off in

a subsequent A.Y.

Sec 79 – Losses in case of closely held Company

51

The company shall ensure that on the last day of the P.Y. in which the loss is sought to be set off, the

shares of the company carrying not less than 51% of the voting power are held by the persons who

beneficially held the shares, carrying not less than 51% of voting power on the last day of the P.Y. in

which the loss was incurred.

Sec 79 - Exceptions

52

The above restrictions do not apply if the change in the voting power takes place due to

• Death of the shareholder • Gift by a shareholder to his relative

Sec 79 - Exceptions

53

From A.Y. 2000-01, the above restriction shall not apply to any change in the shareholding of an Indian Co. which is subsidiary of a foreign co. as a result of amalgamation or demerger of a foreign co.

However, 51% of the shareholders of the amalgamated or demerged foreign co. should continue to remain the shareholders of the amalgamated or resulting foreign co.

Sec 79

54

CIT vs. Shri Subhulaxmi

Mills Ltd. (2001) 249 ITR

795 (SC)

The provisions of this section are applicable only in case of carry

forward of losses. As carry forward of depreciation is covered by the sec 32(2), its carry forward

is not affected by Sec 79.

Sec 80 – Loss returns

55

If the return is filed in accordance with the provision of Sec 139(3), i.e. after the due date mentioned in the sec 139(1)

The loss under the provisions of Sec 72, 73, 74 and 74A shall not be carried forward


56

Section Nature of Loss carried forward

72 Loss from Business Profession 73 Loss from Speculation Business 74 Loss under the head “Capital Gains”

74A Loss from the activity of owning & maintaining race horses


57

However, this condition is not applicable to

Section Nature of Loss carried forward

71B Loss from House property

73A Loss from specified business

32(2) Unabsorbed depreciation

CIT vs. Govind Nagar Sugar Ltd., (2011) 334 ITR 13

(Del)


58

• The requirement to file the return of income on or before the due date prescribed u/s 139(1) is applicable only for the carry forward of loss suffered in that particular assessment year.

• It does not impact the status of carry forward of loss of the previous years

59

Rule 9A of Income Tax Rules – regarding a feature film

Where a film is certified by censor board for release in any P.Y., and the film is not released for exhibition at least 90 days before the end of that P.Y., the cost of production of such film shall be allowed as deduction to the extent of amount realized in that P.Y. and the balance shall be allowed in next year.

CIT vs. Joseph

Valakuzhy (2008) 302

ITR 190 (SC)

Where the balance cost of production is being carried forward for amortization to

subsequent period, it shall not be considered as business loss and hence for set off, the provisions of Sec 80 shall

not apply.


60

Amount of loss Authority for Condonation Up to 10,000 Commissioner of Income Tax From Rs. 10,001 and up to Rs. 1 Lakh

Chief Commissioner of Income Tax

Exceeding Rs. 1 Lakh CBDT

By virtue of powers granted u/s 119(2)(b), the CBDT has clarified vide Circular No. 8/2001 dated 16th May, 2001, that the delay in filing of loss returns may be condoned and the loss may be allowed to be carried forward to subsequent years.

The limits prescribed are as follows -

Loss / depreciation of one person benefiting another person

61

Saroj Agarwal vs. CIT 156 ITR

497 (SC)

The successor of a business can carry forward and set off the loss of his

predecessor if such succession is by way of inheritance - Sec 78(2)

Loss / depreciation of one person benefiting another person

62

When clubbing provisions apply, loss is required to be clubbed in the same manner as income.

The person in whose hands the loss is so clubbed can set off and carry forward such loss as if it is loss determined in his case.

Illustrations :

63

Q. 1 :

64

Particulars Rs.

Mrs. Priya submits the following information for the year ending 31-3-2013

Income from salaries (Rs. 5000 p.m.) 60,000 Income from House Property House A House B House C (self occupied property)

16,000 (-)20,000 (-)12,000

Profits & gains of business / profession Business 1 Business 2 (Speculative)

(-)25,000 35,000

Q. 1 : continued….

65

Particulars Rs.

Please determine the gross total income for the assessment year 2013-14.

Capital Gains Short term capital loss Long term capital gain

(-)18,000

10,000

Income from other sources Income from interest on fixed deposits Loss on maintenance of race horses Interest on securities (gross) Interest on loan borrowed to invest in securities

9,000

(-)12,000 18,000 20,000

Ans. 1 :

66

Sr. No. Particulars Rs. Rs.

Computation of gross total income of Mrs. Priya for A.Y. 2013-14

I. Salaries: Salary @ 5,000 p.m.

60,000

II. Income from house property : House A House B House C

16,000

(20,000) (12,000)

(16,000) III. Profits & gains of business :

Business 1 Business 2 (Speculation)

(25,000) 35,000

10,000

Ans. 1 : continued…

67

Sr. No. Particulars Rs. Rs.

IV. Capital gains : Short term capital loss Long term capital gains To be carried forward to A.Y. 2014-15

(18,000) 10,000 (8,000)

NIL

V. Income from other sources : i) Interest from securities (Gross) Less : Interest on loan ii) Loss on maintenance of race horses

carried forward to A.Y. 14-15 iii) Income from interest on Fixed

deposits

18,000 20,000

(12,000)

(2,000)

9,000

Gross Total Income 61,000

Q. 2 :

68

Particulars Rs.

Mr. Shah submits the following information for the A.Y. 2013-14

Salary income taxable 48,000

House property income : House 1 Income House 2 Loss

37,000

(27,000) Cement business (discontinued on 10-10-2012) (20,000) Brought forward loss of cement business (A.Y.11-12) (80,000) Pesticide business (discontinued on 15-3-12) - b/f loss of previous year 2011-12 - unabsorbed depreciation of previous year 2011-12

(25,000) (15,000)

Q. 2 : continued...

69

Particulars Rs.

Please determine the gross total income for the assessment year 2013-14 and also compute the amount of loss that can be carried forward to the subsequent years.

Pesticide business - Bad debts earlier deducted recovered in July 2012

40,000

Cables Manufacturing Business 62,000 Interest on securities held as stock in trade 10,000

Ans. 2 :

70

Particulars Rs. Rs.

Computation of gross total income. A.Y. 2013-14

I. Salaries : Salary as computed

48,000

II. Income from House property : House 1 Income House 2 loss

37,000

(27,000)

10,000 III. Profits and gains of business or profession : i) Cement business loss ii) Pesticide business – Bad debts recovered taxable u/s 41(4) 40,000 Less: i) Set off of brought forward loss of P.Y. 2010-11 u/s.72 (25,000)

(20,000)

15,000 (5,000)

Ans. 2 : continued...

71

Particulars Rs. Rs.

III. Profits and gains of business or profession : iii) Cable manufacturing - income 62,000 iv) Interest on securities held as stock -in-trade 10,000 Less : b/f loss of business Rs.80,000 restricted to Total Less: Unabsorbed depreciation loss of Rs.15,000 restricted to Rs.10,000 (Note ii)

72,000 67,000 67,000

NIL 58,000

10,000

Gross total income 48000

Ans. 2 : Notes

72

The unabsorbed loss of Rs.13,000 (80,000-67,000) of Cement business can be carried forward to A.Y. 2014-15 for set off u/s.72, even though the business is discontinued.

The unabsorbed depreciation of Rs.15,000 is eligible for set off against any income other than salary income. Accordingly, a sum of Rs.10,000 is adjusted against income from house property. The balance Rs.5,000 is eligible for carry forward and set off to A.Y. 2014-15.

Q. 3 :

73

Can “loss under the head income from business / profession” set-off against Income from Salaries?

Ans. 3 : Section 71(2A) prohibits set-off of loss from business / profession against Income from Salaries. Hence, it is not possible to set-off the same.

Q. 4 :

74

Can “loss” from a business other than a “speculation business” be set-against positive income of Speculation activities?

Ans. 4 :

Yes. “Loss” from a business other than a “speculation business” / “specified business” / “owning & maintaining race horses” can be set-off against positive income of Speculation activities.

Q. 5 :

75

Can “loss” under the head “Income From Business / Profession” (in respect of “Specified business” as defined u/s 35 AD) be set-off against “Income from business / profession” (Other than speculation activities and activities of owning and maintaining race horses)?

No. Loss from specified business can be set off only against the income from Specified business. Hence, the loss from Specified business cannot be set off against income from business other than ‘specified businesses.

Ans. 5 :

Q. 6 :

76

Does Income Tax Act, 1961 contain any provisions for carry forward of losses if any, under the head “Income From Other Sources”?

No. Income Tax Act, 1961 does not contain any explicit provision for carry forward of losses, if any, under the head “Income From Other Sources”

Ans. 6 :

Q. 7 :

77

When a change in the constitution of a firm occurs, whether the firm is allowed to carry forward losses attributable to retired / deceased partner?

No. Such proportionate losses can not be carried forward, except “depreciation losses”.

Ans. 7 :

78

Change in the constitution of the firm takes place in the following circumstances :-

If one or more of the partners cease to be partners or one or more new partners are admitted, 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).

When all the partners continue with a change in their respective shares or in the shares of some of them.

Q. 8 :

79

Can the loss be set off against the “Income from betting”?

No. “Income from betting” is not available for set off of any loss under any head of income against it.

Ans. 8 :

Q. 9 :

80

Can losses under the head “house property” be set-off against “Income From Capital Gains”?

In the Previous Year, losses under the head “Income From House Property” to the extent not set-off by making “inter-source adjustment” against the same head, can be set-off against any other head of income. In the subsequent Assessment Years, losses still unabsorbed under the head “Income From House Property” can only be set-off against Income From House Property only.

Ans. 9 :

Q. 10 :

81

When successor of the business is allowed to carry forward losses of predecessor?

When the business is succeeded by way of an inheritance then only he is allowed to carry forward losses of the predecessor.

Ans. 10 :

Q. 11 :

82

“Short term capital losses” can be set-off against what types of income streams?

Short term capital losses, can be set-off against Short Term Capital Gains or Long Term Capital Gains.

Ans. 11 :

Q. 12 :

83

Whether losses under the head “Income From House Property” and “depreciation” be claimed even if return is not filed on or before due date as specified u/s 139?

Even if return is not filed on or before due date as specified u/s 139 losses can still be claimed as arising out of “Income From House Property” and “depreciation losses”. Late return of filing affects only loss from business/profession and/or loss from “capital gains” as attributable to that relevant Previous Year. It therefore, does not affect carry forward of losses for earlier Assessment Years.

Ans. 12 :

Previous Examination Question

84

Particulars Amount (Rs.) i ) Speculative Loss 4 lakhs ii) Unabsorbed Depreciation 18 lakhs iii) Unabsorbed expenditure of capital nature on scientific research

2 lakhs

iv) Business Loss 120 lakhs

ABC Ltd. was amalgamated with XYZ Ltd. on 01.04.2011. All the conditions of Sec.2(1B) were satisfied. ABC Ltd. has the following carried forward losses as assessed till the A.Y. 2012-13.

(Nov 2010 new syllabus)

Question continued…

85

XYZ Ltd. Has computed a profit of Rs.140 lakhs for the financial year 2012-13 before setting off the eligible losses of ABC Ltd. but after providing depreciation at 15% p.a. on Rs. 150 lakhs, being the consideration at which plant and machinery were transferred to XYZ Ltd. The written down value as per income tax record of ABC Ltd. as on 31.3.2012 was Rs.100 lakhs. The above profit of XYZ Ltd. Includes speculative profit of Rs. 10 Lakhs. Compute the total income of XYZ Ltd. for A.Y. 2013-14 and indicate the loss / other allowances to be carried forward by it.

(Nov 2010 new syllabus)

Answer :

86

Particulars Rs. In lakhs

Rs. In lakhs

Net profit for the F.Y. 2012-13 140.00 Add: Depreciation on P&M @ 15% on Rs.50 lakhs (Note 1)

7.50

147.50 Less: Business loss 120.00 Unabsorbed depreciation 18.00 Unabsorbed expenditure of capital nature on scientific research

2.00 140.00

Total Income 7.50

Computation of total income of XYZ Ltd. for the A.Y. 2013-14

Answer : continued….

87

As per explanation 7 to Sec. 43(1), WDV of amalgamation company shall be actual cost of amalgamated company. Therefore, cost of XYZ ltd shall be Rs.100 lakhs, Accordingly, depreciation on Rs.50 lakhs (150-100) shall be added back.

The order of set off shall be business loss, unabsorbed depreciation and unabsorbed scientific expenditure. Speculation loss cannot be claimed by the amalgamated company by virtue of Sec.72A(7)

Notes:

Lesson Summary

88

Income includes loss. Loss from speculative Business, specified business can

be set off only against profit of that business. Loss from Capital gain can be set off only against income

from Long Term Capital Gain. Whereas Short Term Capital Loss can be set off against short term as well as long term capital gain.

Loss from the activity of owning and maintaining race horses can be set off only against income from that activity.

Business Loss cannot be set off against Income from Salaries.

Loss from house property and IOS can be set off against any income in the same P.Y.

Lesson Summary

89

Section Nature of loss Number of years

To be set off against Carry forward of losses

71B Loss from house property 8 Income from house property

72 Unabsorbed business loss 8 Profits & Gains of business or profession

73 Speculation business loss 4 Income from speculation business

73A Losses of specified business – u/s 35AD

Indefinite period

Income from any specified business

74 Loss under the head ‘Capital Gains’ a) Short Term b) Long Term

8 8

Short term / Long Term CG Long Term Capital Gains

74A Loss from the activity of owning & maintaining race horses

4 Income from same activity

Lesson Summary

90

In case of amalgamation/ demerger/ conversion, the loss of predecessor Co. can be carried forward by the successor Co. except for loss from speculation business if certain conditions are satisfied.

Successor of business can carry forward the loss of predecessor only in case of ‘succession by inheritance.’

Loss can be carried forward only if the return of loss is filed on or before the due date as mentioned u/s.139(1), except, Loss from house property, unabsorbed depreciation and carried forward loss of earlier previous years.

Assessee can set off and carry forward the losses in the order beneficial to him.

Thank You

91

Date post:	18-Mar-2018
Category:	Documents
Upload:	duongdat
View:	217 times
Download:	1 times

Set-off and Carry Forward of Losses -...

Documents