CBDT Planning to limit carry forward of losses

In a move that will limit the carry forward of losses by businesses to reduce their tax liability in subsequent years, the revenue department has issued a ‘departmental view’ on how to set off losses while calculating the taxable income. The circular is in line with a Kerala HC judgment favouring the department, but not in line with the judgments of the HCs of Bombay, Delhi and Karnataka in the last three years that went in favour of taxpayers.

This will restrict the tax planning freedom of a business that enjoys profit-linked cuts. With these deductions already phased out in many areas, SEZ, export-oriented unit (EOU), STPI units that can claim these for defined periods of time are the ones to be most adversely impacted by the CBDT move.

The CBDT has clarified that only that much of losses from various sources of income that remain after setting them off against profits that are eligible as a deduction (say, from an SEZ unit) can be carried forward. Thus, if a business has a transaction leading to a capital loss, it has to first set it off against the profits from an SEZ unit, or from a 100% EOU and only the remaining losses can be carried forward to subsequent years.

Many taxpayers have been claiming the full deduction of SEZ and EOU profits and at the same time, carrying forward the entire losses from other sources to subsequent years, treating the benefit of deduction as an actual tax exemption. This has led to a lengthy litigation in many cases, some of which are still pending in the Supreme Court.

As per the CBDT’s view, only those profits from SEZs, STPs and EOUs (eligible businesses) that remain after adjusting for losses from other sources (ineligible businesses) can be claimed as a deduction from the taxable income, explained Amit Maheshwari, partner, Ashok Maheshwary & Associates. CBDT said the departmental view on the provisions regarding set off and carry forward of losses was being issued in light of different interpretations of it by the officers as well as by different high courts. Deloitte in India said that clarity on this issue could be expected from the SC where the matter is pending. “However this circular will certainly help taxpayers who have taken a stand that above referred sections (10A and 10B of the Income Tax Act) provide for a deduction from the total income and not an exemption,” it said.

(Financial Express)

Tags: CBDT Moves to limit carry forward of losses, Income Tax, Set Off and Carry Forward of Losses.

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SET OFF & CARRY FORWARD OF LOSSES

Set off means the adjustment of losses against the profits from other source of income in the same Assessment Year. If due to inadequacy of profits the losses cannot be set off then that losses are carried forward to the next Assessment Year for adjustment against the profits of that year.

The losses and the maximum period for which the losses can be carried forward or set-off have been described below:-

INTER SOURCE ADJUSTMENT (SECTION 70)

The losses in respect of any source of income under any head of income shall be set-off against the income from any other source under the same head.

Admissible Set-offs                                                                                           

• Loss from one business can be set-off from the income of any other business.
• Long Term Capital loss against Long Term Capital Gain.
• Loss from one House Property can be set-off against the income from another House Property.

Inadmissible Set-off

• Losses from Speculation business.
• Losses from the activity of owning and maintaining Race Horses.
• Long Term Capital Loss from Short Term Capital Gains.
• Losses from Specified business referred to in Section 35AD.

INTER HEAD ADJUSTMENT (SECTION 71)

Under this, Loss under one head of Income can be adjusted or set-off against Income under another head.

Admissible Set-offs

• Losses under any Head of Income (other than Capital Gains) can be set-off against the income under any other Head including Capital Gains.

Inadmissible Set-offs

• Speculation Losses.
• Losses from the activity of owning and maintaining Race Horses.
• Losses under the Head Capital Gains.
• Losses under the Head Profits and Gains from Business & Profession (PGBP) cannot be set-off against the Income under the head Salaries.

  

CARRY FORWARD AND SET-OFF OF LOSS FROM HOUSE PROPERTY (SECTION 71B)

Where for any Assessment year there is loss under the Head House Property & that loss cannot be fully set-off due to inadequacy of profits then so much of the loss that has not been set-off shall be carry forward to the next Assessment Year, not being more than 8 assessment years immediately succeeding the Assessment Year for which the loss was first computed.

CARRY FORWARD AND SET-OFF OF BUSINESS LOSSES (SECTION 72)

Business losses other than speculation losses under the head Profits and Gains from Business and Profession to the extent not set-off shall be carried forward to the next Assessment year, not being more than 8 Assessment Years immediately succeeding the Assessment Year for which the loss was first computed.

Conditions:-

1. The loss should not be in the nature of loss in the Business of Speculation.

2. Assessee must be same.

3. The Assessee must have filed a Return of Loss under Section 139(3) in order to carry forward and set-off of losses.

Note: If the business is succeeded by the legal heir, the loss can be carry forward by the legal heir but the legal heir cannot carry forward the unabsorbed depreciation of the deceased.

CARRY FORWARD AND SET-OFF OF ACCUMULATED BUSINESS LOSSES AND UNABSORBED DEPRECIATION IN CASE OF AMALGAMATION/BANKING COMPANY/ CO-OPERATIVE BANK/   (SECTION 72A/72AA/72AB)

The unabsorbed losses and unabsorbed depreciation of the amalgamating company/ Banking Company/ Co-operative Bank shall be deemed to be the loss and depreciation of the amalgamated company/Amalgamated Banking Company/ Amalgamated Co-Operative Bank.

LOSSES IN SPECULATION BUSINESS (SECTION 73)

If the losses sustained by an Assessee in a Speculation Business cannot be set-off in the same Previous Year, then losses can be carried forward to subsequent Assessment Years only for a maximum period of 4 years from the end of the Relevant Assessment Year in respect of which the loss was computed and set-off only against the income from any Speculation Business carried on by the Assessee.

CARRY FORWARD AND SET-OFF OF LOSSES BY SPECIFIED BUSINESS (SECTION 73A)

Any loss computed in respect of the Specified Business referred to in section 35AD can be set-off only against the profits of any other specified business. The losses can be carried forward indefinitely.

LOSSES UNDER THE HEAD CAPITAL GAINS (SECTION 74)

Where for any year there is a Short Term or Long Term Capital Loss, the loss shall be carried forward and set-off in the following manner:-

Losses                                             Source from where can be set-off

Short Term Capital Loss                     Short Term or Long Term Capital Loss

Long Term Capital Loss                      Long Term Capital Loss

LOSSES FROM THE ACTIVITY OF OWNING AND MAINTAINING RACE HORSES (SECTION 74A (3))

Losses under this head can be set-off only against the Income from the activity of Owning and Maintaining Race Horses. Such loss can be carried forward for a maximum period of 4 Assessment Years.

CARRY FORWARD AND SET-OFF OF LOSSES IN CASE OF CHANGE IN CONSTITUTION OF FIRM OR SUCCESSION (SECTION 78)

Where there is a change in the constitution of a firm, so much of the loss proportionate to the share of a retired or deceased partner remaining unabsorbed shall not be allowed to be carried forward by the firm. However unabsorbed depreciation can be carried forward.

Where any person carrying on any business has been succeeded by another person otherwise than by inheritance, such person shall not be allowed to be carried forward and set-off against his income, any loss incurred by the predecessor.

CARRY FORWARD AND SET-OFF OF LOSSES IN CASE OF CLOSELY HELD COMPANIES (SECTION 79)  

Where there is any change in the shareholding of a company in which public are not substantially interested, any unabsorbed loss of the company shall be allowed to be carried forward and set-off against the income of the previous year only if the shares of the company carrying not less than 51% of the voting power were beneficially held by same persons.

Exception:

1.  Where a change takes place consequent upon the death of a shareholder.

2.  Where a change takes place by way of gift of shares to any relative of the shareholder making the gift.

3.  Where the change takes place in an Indian company, being a subsidiary of foreign company, as a result of amalgamation or demerger of foreign company subject to the condition that 51% of the shareholders amalgamating/demerged company continue to be the shareholders of the Amalgamated/resultant Company.

This Article has been Shared by Student of ICAI Palak Aggarwal. She Can be reached at aggarwal.palak2809@gmail.com

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