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.

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0 responses to “Set-off & Carry Forward of losses in direct tax code”

  1. rahul says:

    Need help in understanding carry forward of long term capital loss from pre-direct tax era to adjust in direct tax era against ordinary sources:

    Q. if i sell a property (which has been held by me for more than 3 yrs) in FY 2011-2012 and incurr an indexed long term capital loss for the same which cannot be adjusted against any long term capital gain in FY 2011-2012, can the loss be carry forwarded to FY 2012-2013 and adjusted against ordinary income in direct tax calculations for FY 2012-2013

    Thanks,

    Rahul

  2. nitin dhavan says:

    my client has following unabsorbed dep and unabsorbed business lossess A.Y 02/03 UD Rs.75.00 lacs and UBL Rs.50.00 lacs during the c.y. & AY 03-04 UD was Rs.25.00 lacs & UBL was Rs.40.00 lacs during the A.Y.10-11 total income is Rs.70.00 lacs so how to take s/off and how to show in itr becasue itr is not having separeate column for unabsorbed lossess B/F.
    in our orinion first take setoff of lossess however the itr is not allowing to c/f unabsorbed dep of a.y. 02-03 plz advice

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