Anjali Goyal
Treatment of Business Losses
In this article, we will analyse the provisions for ‘set off’ or ‘carry forward and set off’ of losses from the head ‘Profit and Gains from business and profession’.
Types of business under the head ‘Profits and Gains from Business and Profession’:-
Speculative Business: Speculative Business is comprised of speculative transactions which means a transaction in which a contract for 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 scrip.
Non Speculative Business: It is comprised of the businesses which is not speculative business i.e. all businesses other than speculative businesses.
Specified Business: It is comprised of the businesses under Section 35D of Income Tax Act.
CURRENT YEAR – SET OFF OF LOSSES
Intra Head:
| Loss from: | To be set off against the profit of: | Whether such set off allowed or not? |
| Speculative Business | Non Speculative Business | No |
| Speculative Business | Specified Business | No |
| Non Speculative Business | Speculative Business | Yes |
| Non Speculative Business | Specified Business | No |
| Specified Business | Speculative Business | No |
| Specified Business | Non Speculative Business | No |
Inter Head:
| Loss from: | To be set off against the profit of: | Whether such set off allowed or not? |
| Speculative Business | Other than business income | No |
| Non Speculative Business | Other than business income | Yes (except Salary) |
| Specified Business | Other than business income | No |
♠ It shall be noted that setting off of losses within same type of business income is allowed.
E. g.- Loss from one speculative business/non speculative business/specified business can be set off with the profits of another speculative business/non speculative business/specified business of the same assessee(Inter type set off is allowed).
SUBSEQUENT YEARS – CARRY FORWARD AND SET OFF OF LOSSES
♠ It shall be noted that, the cases where the set off was not allowed in the current year(under both intra head and inter head), there is no question of allowance for carry forward and set off in subsequent years.
Intra Head:
| Loss from: | To be set off against the profit of: | Whether such set off allowed or not? |
| Non speculative business | Speculative business | Yes |
Inter Head:
| Loss from: | To be set off against the profit of: | Whether such set off allowed or not? |
| Non speculative business | Other than Business income | No |
♠ The loss from Non speculative business shall be allowed to be carry forward and set off in subsequent years against the profits of speculative business, but shall not be allowed against the profits from other than business income.
Priority of set off:
- Current year Depreciation, Current year Scientific Research Capital Expenditure, Current year Family Planning Capital Expenditure
- Brought forward Business Loss
- Brought forward Depreciation, Brought forward Scientific Research Capital Expenditure, Brought forward Family Planning Capital Expenditure
ASSESSEE MUST BE THE SAME
The most vital condition for the allowance of carry forward and set off of losses is that – ‘the assessee who incurred the loss and the assessee who claims the carry forward and set off, must be the same’.
Various cases when business of the assessee is been succeeded by another assessee:-
| The assessee who incurred the loss | The assessee who claims the carry forward | Whether set off shall be allowed or not? | Reasons |
| HUF | Erstwhile member(taken over on partition) | No | Since, assessee has been changed |
| Partnership Firm | Same firm after reconstitution | Yes | Since even though has been reconstituted, assessee has not been changed |
| Firm ABC(one of the partner is Mr. A ) | Firm XYZ(one of the partner oF Mr. A) | No | Even though succeeded firm has one its same partner, but since firm has changed , assessee has also been changed |
| Proprietorship | One Person Company | No | Since, assessee has been changed |
| Proprietorship(Mr. A) | Another Proprietorship(Mr. A) | Yes | Since, assessee has not been changed being Mr. A |
| Amalgamating Company | Amalgamated Company | No | Since assessee has been changed |
♠ It shall be noted that in the last case of amalgamation, if the amalgamation is of the nature specified in Section 72A, then the losses and depreciation of the amalgamating company shall be deemed to be the losses and depreciation of the amalgamating company of the previous year in which the amalgamation took place.
♠ In simple words, if Section 72A has been duly complied with in case of amalgamation, carry forward and set off of losses shall be allowed to the succeeding assessee.
Exception to the above condition:
♠ By Law of Heritance: Where the business of assessee has been succeeded by way of inheritance, the succeeded assessee shall be allowed to carry forward and set off the losses of such business.
Provided, it shall be kept in mind that such exception is available only for losses and not for unabsorbed depreciation.
e.g., Husband ⇒ Wife
Father ⇒ Son
A father/husband dies and his son/wife succeeds to his business. The brought forward losses of father/husband will be carried forward by the son/wife for the balance number of years for which the father/husband could have carried forward.
Case Law: CIT v. Madhukant M. Mehta (2001) 247 ITR 805(Supreme Court). Where sole proprietary (speculation business) of an assessee was carried on by legal heirs by forming partnership firm, firm could claim carry forward of loss of sole proprietor, as it was found by Tribunal that there was succession to business of deceased.
Succession cases :
| Succession cases |
Conditions to be fulfilled |
| Firm ⇒ Company | Section 47(xiii) |
| Company⇒ Limited Liability Partnership | Section 47(xiiib) |
| Proprietorship ⇒ Company | Section 47(xiv) |
| Demerged Co. ⇒ Resulting Co. | – |
| Banking Co. ⇒ Banking Institution | – |
| Co-operative Bank ⇒Co-operative Bank |
In all the above cases, even though the assessee are not same but carry forward and set off of losses shall be allowed to the succeeded assessee.
Provided, certain required conditions has to be been duly complied with to avail the benefits of carry forward and set off of losses.
Note: In these cases, both unabsorbed losses and depreciation can be carry forward and set off in subsequent years.
Also, carry forward and set off shall be allowed only for the balance number of years for which the previous assessee could have carried forward.
RULE: “Business Loss can be carried forward for 8 Assessment Years”
Exceptions:
♠ Loss of Specified Business under Section 35AD can be carried forward for any number of years.
| Succession cases | Conditions to be fulfilled |
| Firm ⇒ Company | Section 47(xiii) |
| Company ⇒ Limited Liability Partnership | Section 47(xiiib) |
| Proprietorship⇒ Company | Section 47(xiv) |
| Amalgamating Co. ⇒ Amalgamated Co. – (both u/s 72A & 72 AA) | – |
In all the above cases of succession, the business losses can be carried forward for more than 8 Assessment Years, provided certain conditions has been duly complied with.
♠ Where the business or profession is noo longer in existence and there is income chargeable to tax under Section 41(1) or 41(3) or 41(4) in respect of that business or profession, then any loss (other than speculation loss), which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year, shall be set off against the incomes chargeable to tax under the aforesaid sub-sections.
♠ Where a business is discontinued in the circumstances referred to in Sec 33B and is re-established within the period specified in Sec 33B, then loss of such business including the brought forward losses shall be allowed to be carried forward to the assessment year relevant to the previous year in which business is re-established and
(i) it shall be set-off against the profits and gains of that business or any other business carried on by him in that assessment year and
(ii) if the loss can not be wholly set off in such assessment year, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding.
Points to be noted:
♣ The cases where the clubbing provisions has been attracted and loss is clubbed in the income of the assessee, such clubbed loss can be set off with the other income of assessee as if the clubbed loss was the loss of assessee.
♣ It is mandatory to set off the losses when certain income is available for the set off adjustment. In simple words, ‘If you want to set off, set off as early available’
Provided, whole amount of loss to be set off is available in the previous year.
e. g,
Amount of loss to be set off is Rs.50,000.
Other Income from which set off is allowed:
1. Rs. 60,000
2. Rs. 40,000
In first case, assessee is mandatorily required to set off such loss in previous year only, if he wants to avail the benefit of set off of losses.
In second case, assessee may further carry forward the loss to be set off in subsequent years since whole amount for set off of loss is not available in previous year.
♣ The carry forward loss of business income can be set off against the dividend income received from shares held as stock in trade, since such shares held as stock in trade are part of the business and so as dividend received therefrom. Such set off shall be allowed even if normally dividend received is been taxed under the head ‘Income from Other Sources’.
Applying the same logic as above,
-any gain from sale of capital assets held in business and sold for business purpose is assessable as ‘Capital Gains’ but can be set off against business loss.
-even rental incomes earned from renting the spaces in a building held for business purpose is assessable as ’Income from House Property’ but can be set off against business loss.
-similarly, other incomes associated with the running of business are assessable as ‘Income from Other Sources’ but can be set off against business loss.
The rationale of the above issue is that even though the above stated incomes were assessable under different heads but the intention behind such incomes were associated with the business. Therefore, it shall be allowed to set off against business loss.
(Author is a Licentiate Company Secretary and CA Final student of ICAI and she can be reached For any queries or suggestions, at anjaligoyal0602@gmail.com)
Click here to Read Other Articles of Anjali Goyal
Vry useful thank you