The Direct Taxes Code Bill, 2009 breaks away from its predecessor in many significant ways when it comes to treatment of losses. While losses from the head capital gains remain a taboo and will have to be set off only against positive income under the same head of income, long-term capital losses do not come for a harsher treatment vis-à-vis the short-term capital losses for the simple reason that no such distinction is contemplated in the entire discussion on capital gains except in the context of allowing the benefit of indexed cost on assets held for more than one year. And there would be no maximum period within which the capital losses carried forward should be set off in common with the treatment accorded to losses under other heads of income as well.
In fact, all losses would hereafter enjoy a free run untrammelled by the eight year time restriction. If anything, this is a good move because, one cannot produce profits out of thin air within the next eight years if they are not forthcoming despite best efforts. If a loss in genuine, it should be allowed to be carried forward infinitely till it is set off.
It is also good that losses that can be carried forward will not be quarantined as it were. Hitherto, loss from business or profession could be set off against any other head of income, save salaries, only in the year in which such loss was incurred and in the subsequent eight years it could be set off only against income from business and profession.
In fact, the DTC divides losses into three categories — losses from ordinary sources except capital losses, capital losses and losses from special sources. The brought-forward losses under each one of these three categories can be set off against income under the same category.
This is liberalisation with gusto, the one which is perfectly rational except perhaps the one relating to losses from special sources to which we would revert in a short while. A positive fallout of this liberalisation for the harried salaried class would be set off of even the past losses from house property against the current salary income which is not possible at present.
The distinction between unabsorbed depreciation and unabsorbed cash losses has vanished perhaps as a sequel to the two liberalisations enumerated above — no time limit and set off against any income at all in future against the same category of income.
In the event, the special treatment given to a species of loss — unabsorbed depreciation — now becomes available to the genus as well. One has always wondered about the wisdom of giving a harsher treatment to cash losses. It is good that cash loss and depreciation would be treated on a par by the DTC.
Loss from windfall?
It is amazing though that it is envisaged that there could be past losses from special sources. Special sources are typically windfalls. One wonders whether there can be any loss from windfalls. At least this was not countenanced under the earlier regime.
By countenancing this now, perhaps the Government would be opening the proverbial Pandora’s Box. People may now be tempted to show losses from lotteries by making the extravagant claim that they have been purchasing lottery tickets for ages and lady luck has smiled only now. It was precisely to foil such attempts that no expenses were allowed against windfalls. Now it is not only proposed to allow expenses in earning windfalls but to allow carry forward of any loss not absorbed by windfalls infinitely. Intrepid tax planners may build their defences by systematically booking losses from special sources just in case.
Under the present regime, losses are not allowed to be carried forward unless return of loss is filed within the specified time. The absence of a similar requirement in the DTC is conspicuous.
It must be inserted lest people discover losses in retrospect when they find that their current income is too high. It seems that in the DTC there would be no embargo on setting off losses from business against income from salary as is the case now. If anything, this embargo is meaningful because normally it is not kosher for a full-time employee to be also in business unless the idea is to use a make-believe business as a tax shelter. It is possible that some people like company promoters who double in as CEOs may also be having their sole proprietorships. But such cases would be few and far between. Therefore, the norm should be that business and employment are incompatible. All in all the changes proposed are progressive but for a few retrograde amendments, rather omissions. These omissions can always be made good before the DTC is signed into law.