Set-off & Carry Forward of losses in direct tax code: Carry forward of loss permitted only if return filed within due date
Set-off & Carry Forward of losses [Sections 58 to 60]
Income from various sources falling within any head of income shall be set-off.
Income / Loss from Capital Gains can be set-off against Loss / Income from any other head of income (from Ordinary Sources), since the differential tax rates in respect of income from capital gains are proposed to be abolished.
Income / Loss from special sources cannot be set-off against Income / Loss from ordinary sources.
No time is limit prescribed for carry forward of unabsorbed losses. Hence, unabsorbed losses can be carried forward indefinitely.
Under the IT Act, the long term capital loss cannot be set-off against short term capital gains or any other heads of income due to differential tax rates. However, in the Direct Tax Code (DTC), such differential treatment has been eliminated. Hence, the losses from capital gains are proposed to be allowed to be set-off against any other head of income.
Further, business loss can be set-off against income from salaries.
There is no distinction between unabsorbed depreciation and business loss; and both the aforesaid shall form part of ‘unabsorbed current loss from ordinary sources’
Set-off & Carry Forward of losses in case of re-organisation [Sections 61]
The unabsorbed losses of the predecessor shall be allowed to be carried forward by the successor subject to fulfillment of business continuity test. The business continuity test is similar to existing provisions.
Under the IT Act, the loss of the predecessor in case of amalgamation could be carried forward only if the predecessor satisfied certain conditions. The condition of fulfillment of such requirements by the predecessor has been eliminated under the DTC.
The benefit of carry forward of losses of the predecessor by the successor in case of an amalgamation has been extended to taxpayers irrespective of the nature of activity carried out by them. Hence, the benefit of carry forward of loss in case of an amalgamation would now also be available to taxpayers engaged in service sector.
Carry forward of loss permitted only if return of income filed within due date [Section 64]
Under the DTC, ‘unabsorbed current loss’ from any source shall be allowed to be carried forward for set-off against income of the succeeding years only if the return of income is filed within the due date.
The DTC states that if the amount of ‘unabsorbed preceding year loss’ exceeds the ‘current income’ then the absolute value of the amount obtained after aggregating the ‘unabsorbed preceding year loss’ with the ‘current income’ shall be deemed to be unabsorbed current year loss.
Thus, in case the return of income for any is year is not filed within the due date, the entire brought forward loss shall not be allowed to be carried forward, irrespective of the fact that the return of income for the year in which the loss was actually incurred was filed within the due date.