Set off or carry Forward & Set off of Losses (Chapter VI – Section 70-80 of Income Tax Act, 1961)

Introduction:

♦ As per Section 2 of the Income Tax Act, 1961 definition of Income includes losses also.

♦ Losses in the Income Tax Act, 1961 are dealt in accordance with Chapter VI of the Act which consist of Section 70 to Section 80.

♦ Assessee paid tax on Total Income. It might be possible that assessee earn income from one source of Income & Losses from other sources of income under the same head. For Example: Losses from business A & Income from business B under the same head i.e. P/G/B/P.

♦ Similarly, it might also possible that the net result of one head is Losses & on the other hand Assessee earn positive income from other head. For Example: Net losses from House Property is Rs 1.8 Lacs & net income from business head is Rs 4 Lacs.

♦ Similarly, it might also possible that net result is total losses during the Previous year after considering all the five heads.

♦ Section 70 to Section 80 deals with the treatment of losses under Income Tax Act, 1961.

♦ This chapter is divided into two parts:

Part A – Set off Losses i.e. Set off of Current Year Losses.

Part – B – Carry Forward & Set off Losses i.e. in the Next Assessment Year

♦ Further Part A is divided into two Parts:

Set off within same head of Income in the Current Assessment Year.

Set off against other head of Income in the Current Assessment Year.

♦ Therefore, Sequence of the treatment of the Losses is as under:

> Set off the Losses of one source of Income with another source of income within same head in the current Assessment Year i.e. Intra-Head Adjustments. (Section 70)

> Set off the Losses of one head of Income with other head of income in the current Assessment Year. For Example: Losses of Business head set of against Capital gains Income i.e. Inter-Head Adjustments. (Section 71)

> After setting if any losses still remain then it will be carried forward to next Assessment Year & set off in that Assessment Year. (Section 71B to Section 80)

♦ Therefore, it should be very clear that First we have to settle the Current Year affairs & then only we can move to Next Assessment Year.

B) Section 70 of the Income Tax Act I.e. Intra-Head Adjustments

> Generally, there is no restriction in Income tax Act, 1961 for making any intra-head adjustments in current Year. Exception to Intra-Head adjustments are as follows:

• Long-Term Capital Losses can’t be adjusted against Short-Term Capital Gains.
• Losses from Speculation business can’t be set off against normal Business Income.
• Losses from owning & Maintenance Race Horses can’t be set of against Normal Business Income.
• Losses from Specified Business U/s 35AD can’t be adjust against Normal Business Losses.

Important Notes:

i) Losses of Short-Term Capital Assets can be adjusted against both LTCG & STCG.

ii) Losses from Speculation Business, 35AD Business, Owning & Maintenance race horses can be adjust against income from same nature.

iii) Further, Normal Business Losses can be adjusted against:

• Income from speculation business
• Income From 35AD Business
• Income from owning & Maintaining Race Horses.

iv) Losses of Self- Occupied House property can be adjusted against Income from Let-Out Property.

v) Similarly, Losses from one let out property can be set off against Income from other let out Property.

vi) The Restriction of Rs 2 Lacs is not applying in intra-head adjustments.

Short Examples on Section 70:

i) Short-Term capital Loss of Rs 1 Lacs can be adjusted against Long-Term Capital Gains of Rs 1,50,000. Total Income under the head Capital Gains = Rs 50,000/- (LTCG)

ii) Long-Term Capital Loss of Rs 1 Lacs can be adjusted against Long-Term Capital gains of Rs 1,20,000. Total Income from Capital gains = Rs 20,000/- (LTCG)

iii) Long-Term Capital Loss of Rs 1 Lacs can’t be adjusted against Short-Term Capital Gains of 1,40,000. Income under the head Capital Gains = Rs 1,40,000 (STCG) & Rs 1 Lacs Losses of Long-Term which will be carried forward.

iv) Normal Business Loss of Rs 6 Lacs can be adjusted against Speculation Income of Rs 8 Lacs. Income under the head Business = Rs 2 Lacs which is speculation Income.

v) Normal Business Loss of Rs 5 Lacs can be adjusted against Section 35AD Income of Rs 4 Lacs. Net Result of PGBP head will be losses of Rs 1 Lac which will be adjusted against other heads of Income.

C) Section 71 i.e. Intra-Head Adjustments:

i) Generally, there is no restrictions of setting of Losses from one head with Income from other heads. Exception to this rule is also there in Section 71.

ii) Where the net result of any head of Income is loss & such loss represent the:

• Losses from Specified Business
• Losses from Speculation Business
• Losses from Owning & maintenance Race Horse
• Loss from Capital Gains whether it is Short-Term Capital Losses or Long-Term Capital Loss

Then these losses will not allow to set off against Income from any other heads at any cost.

iii) Where net result of Income under the head PGBP is losses such loss can’t be adjusted against Salary Income at any cost.

iv) Where Net Result of House Property head is Losses such loss can be set off against any other head only to the extent of Rs 2 Lacs. Balance Losses if any, shall be carried forward to next Assessment Year.

v) However, Losses from other heads of Income (Except capital Gains) can be set off against House Property Income without any restrictions. For Example: Losses from Normal business Rs 10 Lacs can be adjusted against house Property Income of Rs 8 Lacs.

Illustration:

Losses from Speculation Business A –  (Rs 8 Lacs)

Income from Speculation Business B – Rs 4 Lacs

Income from House Property –              Rs 3 Lacs

Ans- Losses from One speculation business can be adjusted against other Speculation Income. No Restriction at all. Therefore, net result of Business head is losses of Rs 4 Lacs which represent Loss of speculation Business. This loss can’t be adjusted against House Property Income of Rs 3 Lacs.

However, if Business A is normal one then net Result of business head will be loss of Rs 4 Lacs which represent normal business loss. Such loss can be adjusted against House Property Income.

Other Important Points with respect to Losses under the head Capital Gains

(i) Losses of Normal business head can be adjusted against Income under the head Capital gains whether Short-Term or Long-Term or both.

(ii) Losses from House Property head to the extent of Rs 2 Lacs can be adjusted against

• Capital Gains income whether Short-Term or Long-Term or both.
• Income under the head Salaries.
• Income from other sources (other than casual income like lottery etc.)

(iii) No loss is possible under the head Income from Salaries.

Carry-Forward & Set-off of Losses in the next Assessment Years

Basics:

i) If the net Result of computation under any heads of income is loss & such loss still not absorbed fully by Income from other head U/s 71 then such losses shall be carried forward to next Assessment Year.

ii) For Example: Net Result of Capital Gains head is Rs 5 Lacs for AY 2021-22. Such losses can’t be adjusted against other head of Income. therefore, it will be carried forward to next year i.e. in AY 2022-22 & shall be adjusted in that year.

iii) In the next Assessment Year Inter-head adjustments is not possible at all. No exception at all.

iv) For Example: Losses of house property of Assessment Year 2018-19 of Rs 3 Lacs can’t be adjusted against Income from Business head in AY 2019-20 of Rs 1 Lacs.

v) This house Property losses of Rs 3 lacs will be known as Brought Forward losses of AY 2019-20.

vi) Carry Forward & Set off of losses is dealt as per Section 71 to Section 80.

Section 71B: Carry-Forward of House Property Losses

• Losses under the house property shall be carried forward to 8 Assessment year & can be adjusted against Income under House Property without any monetary Restrictions.
• For Example: Losses under the head House Property is Rs 6 Lacs in AY 2019-20. Income from Capital Gains in AY 2019-20 is Rs 3 Lacs. As per Section 71 Losses of Rs 2 Lacs can be adjusted against Capital Gains income & Balance losses of Rs 4 Lacs shall be carried forward to Assessment Year 2020-21.
• In Assessment Year 2020-21, it can be adjusted against Income from house property without any monetary restriction of Rs 2 Lacs.
• In such a way, Losses shall be adjusted upto AY 2027-28 i.e. from AY 2020-21 to AY 2027-28.
• Even he is not the owner of house property in respect of which loss is incurred he can carry forward the losses.

Section 72: Carry Forward & set off of Business Losses (Other than Speculative Business)

> Losses from the normal business activities to the extent not set off in Current Year shall be allowed to carried forward upto next 8 Assessment Year.

> In the next Assessment year such losses can be adjusted against Income of speculative business, Non-Speculative Business, Specified Business U/s 35AD & Owning & Maintenance Race Horses.

> Losses carry forward of Business A can be set off against Income of Business b. there is no such restrictions.

> However, Assessee who incurred the losses & assessee who claim the carry forward of losses must be same.

> However, there are certain Exceptions of that rule. It means even if the Assessee is not same then also Business Losses shall be allowed to carried forward. Similarly, there are also some exceptions where business losses can be carried forward more than 8 Assessment year.

> These exceptions cover only normal business losses i.e. Non-Speculative Business Losses only.

Common Exceptions where both Business losses & Unabsorbed Depreciation shall be carried forward beyond 8^th Assessment Years even after the Assessee had changed i.e. ownership of the business is changed:

1) The Accumulated Normal Business Losses & Unabsorbed Depreciation of:

• The Amalgamating Company (i.e. old company) referred to in Section 72A;
• The Amalgamating Banking Companies which includes Private Sector Banks as well   as Public Sector Banks & merged forcefully with another Banking Company’s referred to in Section 72AA;
• The Amalgamating General Insurance Companies which includes Private as well as Public insurance Companies & merged forcefully by Central Government with another Insurance Company’s referred to in Section 72AA;
• The Partnership Firm referred to in Section 47(xiii);
• The Private Limited Company as referred to in Section 47(xiiib)
• The Proprietorship Business referred to in Section 47(xiv);

Such Accumulated Business Losses & Unabsorbed Depreciation shall be deemed to be the Accumulated Business Losses & Unabsorbed depreciation of;

• The Amalgamated Companies (i.e. New Company) as referred to in Section 72A;
• The Amalgamated Banking Companies & General Insurance Companies as referred to in Section 72AA;
• The Successor Company referred to in Section 47(xiii) & Section 47(xiv);
• The successor Limited Liability Partnership Firm referred to in Section 47(xiiib);

& hence, they are allowed to carry forward the normal business losses for fresh period of 8 Assessment year & unabsorbed depreciation indefinitely.

2) There are certain cases also in the Income Tax Act, 1961 where Accumulated Normal Business Losses & unabsorbed Depreciation shall be allowed to be set off even if the ownership had been changed. But it is to be noted that in such a case Period of 8 Years shall not be extended at all. Such cases are:

• Demerger of companies where such losses & Depreciation shall be allowed to be carried forward by the Resultant Companies for the Balance Number of Years referred to in Section 72A.
• Amalgamation & Demerger of the co-operative banks referred to in Section 72AB where Accumulated Business losses & Unabsorbed Depreciation of the amalgamating &Demerged co-operative Banks are allowed to be carried forward by amalgamated & resultant co-operative bank for the balance number of years.

Section 73: Losses of Speculative Business:

• Losses of Speculative business can be adjusted only against speculative income in the same Assessment year.
• If there is no other speculative income remains or after set off still entire losses hadn’t absorbed fully it shall be carried forward to next 4 Assessment years & shall be set off in that Assessment Year in the same manner.
• For Example: For AY 2020-21 – Losses of Speculation Business A – Rs 10 lacs

Income from normal Business B & Income of other Speculation Business C is Rs 8 Lacs & 6 Lacs respectively.

Ans- Losses of Rs 10 Lacs can be adjusted only against Speculation Income of Rs 6 Lacs. It can’t be adjusted against normal Business Income of Rs 8 Lacs. Balance Speculation Losses of Rs 4 Lacs shall have to carried forward in Next 4 Assessment Years i.e. Upto Assessment Year 2024-25.

Some Important Points with respect to speculation business:

> Even a single transaction during the year will constitute Speculation Business.

> Speculation Business is taxable under the head PGBP.

> Speculation Transaction means a transaction in shares, commodities etc. in which it is finally settled without physical delivery.

> However, Transaction in stock Market of Derivatives Like Options, Futures, Swaps, Currency derivatives etc. are not Speculative Transaction irrespective of the fact that the delivery hadn’t affected.

> Similarly, Transaction in commodities (other than Agriculture Commodities) in stock market for which Commodities Transaction Tax is chargeable such transaction are also non-speculative transactions.

> Commodity Transaction Tax are not charged on Agriculture Commodities. Still they are always treated as Non- Speculative Transactions.

> Purchase & Sales of shares Intra-day is known as speculative transactions. Intra-Day means Purchase & Sales of shares within same day. In Intra-Day Transaction no actual delivery takes place.

Section 73A: Losses from Specified Business

• On a similar way, Losses from specified business referred to in Section 35AD can be adjusted only against Income from Specified Business in the current year.
• If any losses still remain, it will be carried forward to next Assessment Year & shall be carried forward to next Assessment Year & so on.
• Such Losses will be carried forward indefinitely i.e. Life Time.

Section 74: Losses under the head Capital Gains

• Where the net Result of the head Capital Gains is Losses irrespective of the fact that it represents short-term or Long-Term, it shall always be carried forward to next Assessment Year.
• Losses under the head Capital Gains shall allowed to carried forward for a maximum Period of 8 Years. For Example: If losses are belonging to AY 2015-16, then such losses can be carried forward upto AY 2023-24.
• In the next Assessment Year if such Losses is Long-Term in nature then it can adjust only against Long-Term Capital gains of that Assessment Year. For Example: Brought Forward Long-Term Capital Losses of AY 2016-17 can be adjusted only against Long-Term Capital Gains of Current AY 2016-17. But it can’t adjust against Short-Term Capital Gains. To summarise:

1) Brought Forward Long-Term Capital Loss – Can adjust against Current Year LTCG but not against Current Year STCG.

2) Brought Forward Short-Term Capital Loss – Can adjust against both Current Year LTCG & Short-Term Capital Gains.

Section 74A: Losses from the Activity of owning & maintenance race horses

• Losses from the activity of owning & maintenance Race horses can be adjusted only against the Income from Activity of owning & maintenance race horse & not against any nature of income.
• It can’t be adjusted against normal business income. Losses to the extent not set off shall be carried forward to next 4 Assessment Years & can adjusted in that Assessment Year in the same manner.

Special Cases of carry Forward of Losses under this chapter 

√ Section 78(1) – where the firm is reconstituted on account of retirement or death of the partner then following losses shall not be allowed to be carried forward by the firm:

Share of the retired partner in the Brought Forward Losses    –     Rs xxxxx

Less: Shares of the retired/death partner in the current year    –     Rs xxxxx

profits upto the death of retirement

√ Section 78(2) – where business is succeeded by any other person then he shall not be allowed to carry forward any losses in this chapter. For example: Mr X succeeded the trading of cloth business of Mr Y. He will not allow to carry forward the losses that were incurred by his predecessor. Losses means losses incurred in any head of income.

√ However, in case of inherited business successor will allowed to carry forward the losses including business losses for the balance number of years.

√ For Example: Mr M inherited the business of speculation business of his father. Father incurred losses in that business of Rs 16 Lacs. Assessee will be allow to set off such speculation losses of his father against his own speculation Income. It was held by the landmark Judgment of Madhukant M Mehta.

√ However, in the case of inheritance successor will not allowed to carried forward the unabsorbed Depreciation of the predecessor.

√ Similarly, if a partnership firm is succeeded by the erstwhile partner then he will not be allowed to carry forward the Losses of the partnership Firm.

√ Similarly, Losses of the HUF will not be allowed to be carried forward by the Karta after the partition of HUF.

√ Exception of the succession means cases where successor allowed to carry forward the losses i.e. only Business Losses & Unabsorbed Depreciation is already discussed above in Section 72A/72AA/72AB/47(xiv)/47(xiii)/47(xiiib).

√ The Losses from the source of Income which is otherwise exempted in the law is not allowed to set off in Income Tax Act, 1961. (CIT Vs Pramod Mittal)

√ Where a business is discontinued in the circumstances referred to in Section 33B of the Act & re-established within the period of 3 years from the end of such previous year then business loss including brought forward losses shall be allowed to carry forward in that Previous year & next 7 Assessment Year after that year.

√ Circumstances referred to in Section 33B includes flood, typhon, cyclone, earthquake, Riots or civil disturbances etc.

√ For Example: Business of Assessee is discontinued on 31/01/2012 due to floods. Business Losses of Assessment Year 2013-14 was Rs 5 Lacs & Brought Forward Business Losses of AY 2011-12 was Rs 7 Lacs. The business is re-established on 25/03/2015. Applying the provision of Section 72, Assessee will allowed losses of Rs 12 Lacs in Assessment Year 2016-17. Assessee can adjust the same against the profits of Assessment Year 2016-17. Such loss shall be allowed to carry forward upto Assessment Year 2023-24.

Section 79: Restrictions on carry forward of losses in case of closely held companies

1) Closely held companies (other than eligible start-ups) are allowed to carried forward & set of the losses in the previous year only if the following conditions is satisfied:

• A Shareholding has been changed in the Previous Year (suppose shareholding change on 25/06/2020 i.e. PY 2020-21)
• Losses incurred in any previous year prior to that Previous Year (Suppose Losses belongs to PY 2018-19)
• Shareholders who were beneficial owner of equity shares of not less than 51% as on 31/03/2019 & 31/03/2021 were same person.

2) However, in case of eligible start-up being a private company they can carry forward the losses even if conditions of 51% is not satisfied. If on the last day of previous year in which losses is incurred (say on 31/03/2018) & the last date of previous year in which such losses are intended to be set off (say on 31/03/2021) shareholders continue to hold those shares.

3) For Example: X Private Limited have two shareholders Mr A & Mr B. Both hold 1 Lacs equity shares each. Losses of Previous year 2016-17 is say Rs 15 Lacs. These losses shall be allowed to carried forward & Set off against the income of the Previous year 2020-21 even if Mr A & Mr B continue to hold those 1 Lacs shares as on 31/03/2021. They don’t require to satisfied 51% Criteria.

4) But if they sale even a single share then they will allow to carry forward the losses only if condition of 51% is satisfied.

5) For the purpose of Section 79, following changes of shareholding shall not be considered:

• Changes take place in case of death of the shareholder
• Changes due to gift of the shares to the relatives.
• If gift of shares is given to other than relatives then it will considered as change of shareholding.
• Changes of shareholding of Indian Company due to amalgamation or demerger of foreign company subject to conditions specified in Section 47 of the Act.
• Changes of shareholding have been taken place as per resolution approved under Insolvency & bankruptcy Code, 2016.
• Changes take place as per enforcement taken place by NCLT by removing the director of the company.

Residuary Provisions:

1) This chapter doesn’t deal with Depreciation & Unabsorbed Depreciation. They will be dealt as per Section 32 of the Act. Therefore, Section 79 doesn’t deal with Unabsorbed depreciation. (CIT Vs Concord Industries Limited)

2) Losses from the casual incomes like lottery, gambling, Crossword Puzzles, winning from horse racing etc. shall not be allowed to set off against any other head of income at any cost. Neither they will be allowed to carry forward the losses.

3) Losses from other sources like Business losses can’t be allowed to set off against Casual Incomes like lottery etc.

4) Unabsorbed Depreciation shall be allowed to carry forward indefinitely provided assessee must be same. Even if business is discontinued it will be allowed. There are some exceptions to this which already discussed in Section 72.

5) Losses under the head Capital Gains, Business head (including speculative losses, owning & maintenance race horses & specified Business) shall not be allowed to carried forward to next assessment year unless assessee filed his Return of Income within due date U/s 139(1).

6) Losses under the head House Property & Unabsorbed depreciation can be carried forward even if the ROI is not filed by the Assessee.

7) However, Current Year Set off of losses can be done even if the ROI is filed after the due date. Since, restrictions are only for Carry Forward of Losses.

8) Priority of Set off Business losses are:

• Current year Depreciation, CY Scientific Research capital Expenditures, CY Family Planning expenditures
• B/F Business Losses
• B/F Depreciation, Scientific Research Expenditures & Family Planning Expenditures.

9) Unabsorbed Depreciation shall be first set off against Business Income. Balance if any, can be adjusted against other heads of Incomes like Capital gains, house Property, salary, Other sources also.

10) Losses of Speculation Business, 34AD Business, Owning & Maintenance Race Horses & Long-Term Capital Losses can either be set off against same nature of Income in Current Year otherwise they have to carried forward in all circumstances.