135972720610_Set Off and Carry Forward

8/11/2019 135972720610_Set Off and Carry Forward

1/22

Set off and Carry Forward 393

11 00

RELEVANCE 3 %

DEVOTION 1 HOUR

SET OFFAND CARR YFOR WARD

HISTORICAL RELEVANCE 12

10

8

6

4

2

0

May Nov May Nov May Nov May Nov May Nov May

07 07 08 08 09 09 10 10 11 11 12

Marks


2/22

394 DIRECT TAX

Set off and Carry For ward

Sectionwise Over view:

Section Particulars Page No.

70 Intra Head adjustment 395

71 Interhead adjustment 397

71B Carry forward and set off of loss from house proper ty 398

72 Carry forward and set off of business losses 399

72A Amalgamation/ Demerger/ Businessreorganization 400

72AA Amalgamation of a banking company witha banking institution

402

72AB Business reorganizationof co operative banks 402

73 Speculative losses 403

73A Losses of Specified Businesses 398

74 Capitalloss 398

74A Loss from owning and maintain horses 398

78 Change in constitution of the fir m 409

79 Carry forward and set off of loss of closely 411 held companies

94(7) Dividend StrippingTransactions 396

94(8) Bonus StrippingTransactions 396


3/22

Set off and Carry For ward 395

FORTUNES in life keep changing and the possibility of earning income from different sourcesis by no means an exception to it. In other words, a person may earn income from a particular

business in the current year, end up making a loss the next year, so on and so forth. Whensuch a situation arises what are the tax implications on the same? How would you adjust lossesfrom one source with the gains of another? Is it possible to set off losses from one head of incomewith gains of another? What happens if your losses are more than your incomes? These and manymore issues pertaining to treatment of losses would be clarified in the next few pages of thischapter.

As we all know, the only source from which you can never have a loss is Income from Salaries-that apart every other head of income be it Capital Gains, Business or Professional Income,Income from House Property or Income from Other Sources has a probability of making losses.Hence the relevance of this chapter is well understood.The entire chapter, comprised within Sec 70-79, deals elaborately on all possible issues pertainingto Set Off and Carry Forward including succession of business. Let s now look into each of thesesections in detail.

10.1 Set Off of Current year Losses :- Sec 70 and 71 Set off of losses can be studied from two perspectives namely:

Set off under the same head of income Sec 70 (Intra-head adjustments) Set off of losses from one head against any other head of income Sec 71 (Inter-head

adjustments)

10.1.1 Set off under the same head of income Sec 70: Where an assessee incurs loss from any source of income falling under any head of income otherthan Capital Gains he can set off such loss against his income from any other source under thesame head of income

For example : If an assessee has 2 businesses namely selling wood and selling rubber andhe earns a profit of Rs 50k from wood and incurs a loss of Rs 30k from rubber he can set off theloss from rubber business against the profit earned in wood. Hence his net business income will

be Rs 20k.

Exceptions: Loss from a specified business referred to in section 35AD

Loss from a specified business can be set off only against income from a specified business - Sec 73A

Capital Losses: Short term capital loss can be set off from any Capital Gains (long term or short term) Long term capital loss can be set off only from Long term Capital Gains

Loss from Speculative business- Sec 73: Loss from a speculative business can be set off only against income of another speculative

business


4/22

396 DIRECT TAX


5/22


Business loss from any other business (non speculative) can be set off against speculative business profits

Loss from owning and maintaining horses- Sec 74A: Loss from this activity can be set off only against income from this source

Loss on account of lottery/card games etc: No loss, expenditure or allowance is allowed from winnings from lotteries or crossword

etc No loss from this source of income is allowed to be set off from any other source of

income

Losses from exempted sources of income cannot be set off from a taxable income Dividend Stripping Transactions - Sec 94(7) : Losses incurred by an assessee, to the extent

of dividend, shall not be allowed for set off / carry forward where a person: acquires any unit or security within 3 months prior to the record date and sells or transfers such unit within 9 months after the record date or such security within 3 months after the record date and dividend or income from such unit or security is exempt.

For example - Mr A had acquired units of Religare Mutual Fund on1 st of January for Rs 50 per unit. Subsequently on 3rd of March Religare declared a dividend of Rs 10 per unit. Mr Athen sold his holding at Rs 45 per unit on 15th of March. Would your answer change if Mr Ahad sold the unit for Rs 35.

In this case, since Mr A had acquired the unit within 3 months before the record date and hadtransferred the same within 9 months from the record date, the provisions of Sec 94(7) shallapply to the transaction.

Total dividend recieved Rs 10

Case 1:

Loss on sale of unit : Rs 5 (Rs 50-45)According to Sec 94(7), losses to the extent of dividends recieved shall not be eligible for setoff. Since the loss is lower than the dividend recieved, the entire loss shall be disregarded.

Case 2:

Loss on sale of unit : Rs 15 (Rs 50-35)According to Sec 94(7), losses to the extent of dividends recieved shall not be eligible for setoff. Therefore losses in excess of the dividend recieved shall be eligible for set off.

Hence in this case Rs 5 being excess of loss over dividend recieved, shall be eligible for setoff.


6/22

398 DIRECT TAX

Bonus Stripping Transactions Sec 94(8): Where a person Acquires any units within 3 months prior to the record date and Such person is allotted bonus /additional units without any payment and Transfers such unit, while continuing to hold all or any of the additional units, within a period of 9 months from the record date.

then, losses incurred on purchase and sale of such units shall not be allowed.

Amount of loss ignored shall be considered as the cost of acquisition of the additional units

Speculative Transaction 43(5): Transaction involvinga contract for purchase and sale ofcommodities includingstocks and shares, which is periodicallyor ultimately,settled otherthan by actual deliveryor transfer of commodities or scrips.

Exceptions: A contract entered intoto guard against loss due to price fluctuations (hedgingcontracts) inthe followingcases: Raw materials inthe normal course of business Stocks and shares entered by dealer or investor Member of a forward market or stock exchange inthe course of jobbing or arbitrage.

Transfer of Derivativesis not a speculative transaction provided: It is carried out electronically on screen based systems through registered brokers/ sub brokers/

intermediary Transaction would be suppor ted by a Time Stamped Contract Note issued by such broker/ sub

broker/ intermediary indicatingthe Unique identification numberand PAN no.The provisionof Sec 70 shall apply even to clubbed incomes. For example- father s loss can be set

off against clubbed sons income CIT vs.J H Gotla (1985) 156 ITR 323 (SC)

Provisions forset off are mandatory and not optional forthe assessee

10.1.2 Set off of losses from one head against any other head of income Sec 71

Where an assessees income under any head is a loss, such loss can be set off against any otherhead of income.

Exceptions: The following losses cannot be set off against any other head of income:

Capital Loss (long term and short term) Loss from speculation business Loss from owing and maintaining horses Loss from lottery card games etc Loss from an exempted source Loss from a specified business referred to in section 35AD

Loss from business or profession cannot be set off against the head salaries w.e.fassessment year 05-06

10.2 Carry forward and Set off of losses: Where an assessee is not able to completely set off his losses against income under the samehead or other heads of income during the same year such unabsorbed losses can be carried


7/22

Set off and Carry For ward 399 forward and set off from income of subsequent years.

However only the following losses can be carried forward and set off in the subsequent years: Loss from House property Sec 71B Business loss Sec 72 Speculation Loss Sec 73 Capital Loss Sec 74 Loss from owning and maintaining horses Sec 74A Loss from specified businesses referred to in Sec 35AD- Sec 73A

L osses apart f rom the above cannot be carr ied for ward.F or example L oss on i nterest onsecur iti es where it is assessed un der I ncome fr om other sour ces.

Assessee should file the return of loss within the due date of filing returns. However thiscondition is not mandatory for loss from house property and unabsorbed depreciation, capitalexpenditure on family planning and capital expenditure on scientific research Sec 80

Such loss as per return should be notified by the Assessing officer in writing u/s 157. Delayed filing of returns does not affect the right of the assessee to set off and carry

forward losses of the past year (other than the relevant previous year). For example, if theassessee had a loss of Rs 2 lacs pertaining to the previous year 06-07 and has filed a belatedreturn for the year 07-08, he would still be eligible to carry forward and set off the loss of the

previous year 06-07.


8/22

400 DIRECT TAX

Carry Forward and Set off of Losses Summary of the Provisions

Head of Income Carried forward and set off Remarks/ Conditions House propertyLoss Sec 71B

8 subsequent assessmentyears

Provisions of Sec 80 are notapplicable

Can be set off only against Incomefrom House Property

Business Loss Sec 72


However the following

losses can be carried forwardindefinitely:1. Unabsorbed Depreciation 2. Unabsorbed capital ex-

penditure on Scientificresearch

3. Unabsorbed family planning expenditure

Can be set off only against businessincome

Business need not be in existence in theyear of set off

Losses can be set off only by theassessee who has incurred the lossexcept the following circumstances:

1. Succession of a business through inheritance

2. Amalgamation u/s 72A3. Succession u/s 47(xiii) / 47 (xiv) 4. Demerger

Speculation Loss Sec 73


Can be set off only against speculativeincome

It is not necessary that assessee must

continue the speculative business in theyear of set off Loss fromSpecified

business u/s35AD- Sec 73A

No restrictive time limit losses can be carried forwardfor infinite number of years

Can be set off only against incomefrom any specified business

Provisions of Sec 80 shal l not apply

Capital Loss Sec 74


Short term capital loss can be set offagainst any Capital Gains (long term /short term )

Long term capital loss can be set offonly against long term capital gains

Loss fromowning andmaintaininghorses Sec 74A


Business must be in existence in theyear of set off

Can be set off only against incomefrom this activity


9/22


Orderof set off of losses CIT vs. Hari Prasad [ 1975] 99 ITR 118 (SC) 1. Current year expenditureon Scientificresearch and family planning

2. Current year depreciation 3. Brought forwardloss - business loss4. Unabsorbed capital expenditureon Scientificresearch5. Unabsorbed Depreciation 6. Unabsorbed family planning expenditure

Business Loss Sec 72: - Loss of one business can be set off against profits of another business in subsequent year

- Where shares are held as stock in trade, deemed dividend u/s 2(22)(e) on such shares can beset off against business losses Western States Trading Co Pvt Ltd vs. CIT [1971] 80 ITR 21 (Supreme Court)

- Business of spouse or minor child clubbed with the income of the assessee can be set offagainst brought forward business losses of the assessee CIT vs. J.H.Gotla [1985]1 5 6 ITR 323(SC)

- Business continuation is not necessary for the purpose of set off of losses

Losses to be set off by the person who has incurred such losses - Sec 78(2) - Losses can be carried forward by the assessee who has incurred the loss. However in the

following circumstances, losses can be set off by a person other than the person who hasincurred the loss:o Inheritance of business - However, unabsorbed depreciation cannot be carried forwardo Amalgamation and Demerger of companies Sec 72Ao Amalgamation of Banking company u/s 72AAo Succession of a sole proprietary concern or partnership firm by a company u/s 47(xiii)/(xiv)

No loss can be carried forward beyond eightyears notwithstanding the fact that there wasno assessment for one of the years CIT Covelong Beach Hotel (India) Ltd [2003] 129Taxman 473 (MAD) .

Where shares are held as stock in trade, dividend income shall be treated as business income and losses

can be set off againstthe same CIT vs. Ramnath Goenka - [2003] 259 ITR 26 (MAD).Where losses are not set off againstthe profits of the immediately succeeding year or years, they cannot

be set off against profits at a later date- B.C.S. Kartar Chit Fund and Finance Co (P) Ltd vs. CIT [1989] 46 Taxman 88 (Punjab and Haryana) According to Sec 41(5), loss of a discontinued business per tainingto the year of discontinuance can becarried forward and set off against profitsof such business u/s 41(1) /(3)/(4)/(4A). This is the only casewhere accumulated losses can be set off beyond8 years.Loss of a business acquired by inheritance Sec 78 - CIT vs. Bai Maniben[1960] 38 ITR 80 (BOM).


10/22

402 DIRECT TAX

The term inheritance means only a transmission of assets and liabilitiesof one person toanother by personal law Hindustan Aeronautics Limited vs CIT[ 1984] 149 ITR795 [KAR] .

Unabsorbed depreciati on cannot be carr ied for ward in the case of inheritance since Sec 32(2) does not cover i nher itance.

Where legalheirs of a deceased proprietor carry on his business as a par tnership firmunder the samename and trade- it was held that the losses of the proprietary concern can be carried forward and setoff against the profits of the partnership concern CIT vs. M adhukant M M ehta [2001] 247 ITR 805 (SC )

When Business loss or unabsorbed depreciation cannot be carried forward: - Loss or unabsorbed depreciation of a HUF cannot be carried forward by a member of the

HUF on partition of HUF- U absorbed depreciation cannot be carried forward on account of inheritance since inheritance

is not covered u/s 32- Loss or unabsorbed depreciation of a firm succeeded by another firm cannot be carried forward

since the assessee has changed- Loss or unabsorbed depreciation of a sole proprietary concern taken over by a firm cannot be

carried forward even if the proprietor is a partner of the firm- Loss or unabsorbed depreciation of a partnership firm taken over by one of its partners cannot

be carried forward in the hands of such partner.

10.3 Carry forward and Set off in thecase of Amalgamation- Sec 72A(1)/(2)/(3) Accumulated loss and unabsorbed depreciation of an amalgamating company can be carriedforward and set off by the amalgamated company if the following conditions are satisfied:

Amalgamation is of ano Industrial Undertakingo Shipo Hotelo Public sector company/companies engaged in operation of aircrafts with one or more

public sector companies engaged in similar businesseso Banking company with a specified bank

Note: Industrial undertaking refers to an undertaking which is engaged in:o Manufacture or processing of goodso Manufacture of computer softwareo Generation or distribution of electricity or any other form of powero Providing telecommunication serviceso Miningo Construction of ships, aircrafts or rail systems

Conditions to be satisfied by the amalgamating company:o Should be engaged in the business, in which the accumulated loss/depreciation occurred,

for 3 or more years


11/22


o Has continuously held at least 75% of the book value of fixed assets on the date ofamalgamation, for a period of 2 years prior to amalgamation

Conditions to be satisfied by the amalgamated company:o Holds for a minimum period of 5 years, at least 75% of the book value of fixed assets of

the amalgamating company acquired on amalgamationo Continues the business of the amalgamating company for a period of 5 years from the

date of amalgamationo Such other conditions as may be prescribed under Rule 9C.

Conditions as per Rule 9C:o The amalgamated company achieves at least 50% of the installed capacity of the

amalgamating company within 4 years from the date of amalgamationo The amalgamated company maintains the minimum capacity of 50% of installed capacitytill the end of the 5 th year from the date of amalgamation

o Amalgamated company shall furnish a report of a chartered accountant in Form 62 for theabove purpose.

In the event of any violation of the above conditions:- The losses already set off shall be considered as income of the amalgamated company in the

year of violation.- Further the remaining unadjusted business loss and unabsorbed depreciation cannot be carried

forward.

In case of amalgamation of sick industrial company with another company BIFR has power to grant benefit flowing from section 72A without referring matter to revenueDGIT vs. Orient Vegetax Pro Ltd. [2012] 25 taxmann.com 339 (Delhi)

If all the above conditions are satisfied, the accumulated losses of the amalgamating companycan be carried forwardand set off fora fresh period of 8 years from the year of amalgamation.Unabsorbed depreciationcan be carried forward indefinitely.

10.4 Business Reorganization Sec 47(xiii)/(xiv) Sec 72A(6) Where there is a succession/ reorganization as per sec 47(xiii)/(xiv)[conversion of a partnershipfirm/sole proprietary concern into a company], the accumulated losses and unabsorbed depreciationof the sole proprietary concern/ partnership firm can be carried forward by the successor company.

The accumulated losses of the predecessor entitycan be carried forwardand set off fora fresh period of 8 years from the year of conversion. Unabsorbed depreciationcan be carried forwardindefinitely.

In the event of any violation of the conditions u/s 47(xiii)/(xiv):- The losses already set off shall be considered as income of the successor company in the year

of violation.- Further the remaining unadjusted business loss and unabsorbed depreciation cannot be carried

forward.


12/22

404 DIRECT TAX

In the case of conversion ofa private limited companyor an unlisted public limited companyintoa LLPas referred u/s 47(xiib),the accumulated loss / unabsorbed depreciationof the predecessor company, shall be deemed to be the loss of the successor LLPof the previousyear in which business reorganisation was effected and the provisions of set offand carryforward of loss and allowance for depreciation shallapply accordingly.

Where any of the provisions contained in Sec 47(xiib) are subsequently violated, the set off of lossor allowance of depreciation made in any previous year in the hands of the successor limited liability partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in the year of violation.

10.5 Carry forward and Set off in thecase of Demerger Sec 72A(4)(5) Where the loss / unabsorbed depreciation is directly relatable to the undertaking transferred

to the resulting company, the entire amount of such loss and depreciation shall be allowed inthe hands of resulting company

Where such loss or depreciation is not directly attributable, then such losses shall bedistributed in the proportion of assets transferred and held by the demerged company

The unabsorbed business loss can be carried forward by the Resulting Company as if suchdemerger has not taken place i.e. it can be car ried forward only for the remaining unexpired period.

10.6 Carry forward and Set off on amalgamation of a Banking companywitha Banking Institution- Sec 72AA Where there is an amalgamation of a banking company with a banking institution under

a scheme of Central Government as per the Banking Regulation Act 1949, accumulatedloss and depreciation of the banking company shall be deemed to be th e loss / unabsorbeddepreciati on of the banki ng institution of th e previous year i n whi ch such amalgamationhas taken place.

In other words, accumulated losses can be carried forward for a fresh period of 8 years.

Unabsorbed depreciationcan be carried forward indefinitely.

10.7 Business reorganization of co- operative banks Sec 72 AB The term business reorganization includes both amalgamation and demerger.

In the case of Amalgamation: Unabsorbed losses can be carried forward by the amalgamatedcompany for the unexpired period.


13/22


In the case of Demerger: Split losses on the basis of relevance or assets transferred betweenthe demerged and resulting company. Losses can be carried forward only for the unexpired

period. Conditions for predecessor bank:

Should have been engaged in banking for 3 years or more and Should have held at least 75% of the fixed assets for a minimum period of 2 years

prior to the date of business reorganization Conditions for successor bank

Hold at least 75% of the fixed assets for a period of 5 years from the date of succession Continue the business of banking for a period of 5 years from the date of re organization

Fulfill such other conditions as may be prescribed by the Central Government.

Accumulated loss means so much of the loss of the predecessor firm or the proprietar yconcern or the private company or unlisted public company before conversion into limitedliability partnership or the amalgamating company or the demerged company,as the case may be, under

the head Profitsand gains of business or profession (not being a loss sustained in a speculation business)whichsuch predecessor firm or the proprietaryconcern or the company or amalgamating company ordemergedcompany, wouldhave been entitledto carry forward and set off u/s 72 if the reorganisation of business orconversion or amalgamation or demerger had not taken place

Unabsorbed depreciation means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limitedliability partnership or the amalgamating company or the demerged company,as the case may be, which remains to beallowed and which would have been allowed to the predecessor firm or the proprietary concern or thecompanyor amalgamating company or demerged company, as the case may be, under the provisions of this Act, ifthereorganisation of business or conversion or amalgamation or demerger had not taken place.

10.8 Speculative losses Sec 73 According to explanation to Sec 73: Where the assessee is a company and

The gross total income of the company Does Not mainly consist of:o Income from house property

o Capital gainso Income from other sources and

The principal business of the company is Not banking, or granting of loans and advancesand

The business of the company consists wholly or partly of purchase and sale of shar es ofother companies-

Such company shall be deemed to be carrying on speculative business to the extent of purchase and sale of shares.

The above provision is applicable even if there is no avoidance of tax by the assessee.


14/22

406 DIRECT TAX

Where the assessee was dealing in Government securities without actual delivery, it fellwithin the ambit of Sec 43(5) speculative business and hence loss from the activitycannot be set off against normal income from banking by vir tue of Sec 73 ANZGrindlays bank vs. D CIT [2004] 88 ITD 53 (Delhi)

For the purpose of explanationto Sec 73, the relevant criteriais the composition ofgross total income andnot the percentage of funds of the assessee held as investments Melville Finvest Ltdvs. J CIT [2004]89 ITD528 (Hyderabad) For the purpose of Sec 73, it is not mandatory that the purchase and sale of shares should take placewithin thesame year. What is required is that the business of the assessee should consist of purchase andsale of shares DCIT vs. Aakrosh Investment Leasing (P) Ltd [2004] 90 ITD287 (Mumbai)Loss suffered by an assessee share broker on account of purchase of shares on his own account(considered speculative u/s 73) cannot be set off against receipts of brokerage earned from trading on behalf of clients or any other income under the head Capital gains or Income from other sources SRJ Securities Ltd vs. A CIT [2003] 86 ITD 583 (Delhi) Continuityof business is not required Loss incurred in speculative business in banned items cannot be carried forward to the next year CIT vs. Kurji Jinabhai K otecha [1977] 107 ITR 101(SC)Assessee had incurred a loss in trading inshares. Tribunal held thatloss incurred on sale of shares wouldnot fall within Explanationto Sec 73 and the same could not be disallowed. Hence, Sec 73 is notapplicable and the deduction claimed by the Assessee is valid -CIT vs. Asiatic Industrail Gases Ltd.[2012] 19 Taxmann.com 294 (KAR .)Explanation to section 73 does not operate in respect of a company whose gross total income

consists mainly of income which is chargeable under heads of 'interest on securities', 'income fromhouse property', 'capital gains' and 'income from other sources' CIT vs. HSBC Securities &Capital Markets India (P.) Ltd [2012] 23 taxmann.com 377 (Bom.)

Mr. P, a resident individual,furnishes the following par ticulars of his income and other details for the previous year 2012-13:

Rs. i Income from salary 18,000 ii

Net annual value taxable under income fromhouse proper ty 70,000 iii Income from business 80,000 iv Income from speculative business 12,000 v Long term capital gainon sale of land 15,800 vi Loss on maintenance of race horse 9,000 vii Loss on gambling 8,000

Depreciation allowable under the Income-tax Act comes to Rs.8000 for which no details are givenabove.

The other details of unabsorbed depreciationand brought forward losses are:

Rs. i

Unabsorbed depreciation

9,000

ii Loss from speculative business 16,000 iii Shor t term capital loss 7,800 iv Unrealised rent 17,000

Compute the gross total income of Mr. P, for the Assessment year 2013-14 and amount of loss that can


15/22

Set off and Carry For ward 407 or cannot be carried forward.

Solution:

Gross total income of Mr. P- The following assumptions have been made to calculate gross total

income- Brought forward loss from speculative business per tains to the assessment year 2009-10

(or any subsequent year up to the assessment year 2012-13).

Brought forwardshor t-term capitalloss pertains to the assessment year 2005-06 (or subsequent yearupto the assessment year 2012-13).

Unrealised rent is rent which couldnot be realised by Mr. P up to March 31, 2012. It is not loss under the

head Income from house proper ty under section 71B.Depreciation ofthe current year ofRs.8000 is depreciation deductible under section32 in respect of non-speculative business.

Net annual valueof Rs.70000 given inthe problem is calculated before deducting standard deductionu/s24(a).

Computationof gross total income-Salaries

Income from house proper ty Net annualvalue

Rs.

70,000

Rs. 18,000

Less: Deduction under section24 (30% of Rs.70000) 21,000

House proper ty incomeProfits and gains of business or profession Non-speculative business 80,000

49,000

Less: Current year depreciation 8,000 Balance 72,000 Less: Brought forward unabsorbed depreciation 9,000 Balance (a) 63,000 Speculative business 12,000 Less: Brought forward speculative loss 16,000 Balance (loss of Rs.4000 will be carried forward) (b) Nil Income from business {(a) + (b)}Capitalgains-Long-term capitalgains 15,800

63,000

Less: Brought forwardshor t-term capital loss 7,800 8,000 Gross total income 1,38,000

Ms Geetha is a resident individual, providesthe following detailsof her income/losses forthe year ended31.3.2013:

Salary received as a par tner from a par tnership firmRs.750000.

Losses on sale of shares listed in BSERs.30000. Shares were held for15 months and STT paidon sale.

Long-term capital gainon sale of

landRs.500000.

Rs.51000 received incash from friends in par ty.

Rs.55000 received towards dividendon listed equity shares of domestic companies.

Brought forward business loss of assessment year 2011-12 Rs.1250000. The return forassessment year2012-13 was filed intime.


16/22

408 DIRECT TAX

Profits and gains from business or profession 7,50,000 Less: Brought forward business loss of assessment year 2011-12 7,50,000 Nil

Compute gross total income of Ms. Geetha forthe assessment year 2013-14 and ascer tain the amountof loss that can be carried forward.

Solutions:

Computationof gross total income of Ms. Geetha-

Rs.


17/22


Income from capitalgains 5,00,000 Income from other sources Gif t 51,000 Dividend froma Indian company (*exempt under section10(34)) Nil 51,000 Gross total income 5,51,000

Note: Brought forward business loss of assessment year 2011-12 of Rs.500000 (the unadjusted amount)will be carried for ward.

Long-term capital loss on transfer of shares cannot be set off. Undersection 10(38) long-term capitalgain on transfer of shares is exempt from tax if securities transaction tax is applicable. Conversely, anylong-term capital loss in such case is not taken into consideration. i.e. loss from transaction where

income would otherwise have been exempted from tax, is not eligible for set off against otherincome

Mr. Soohansubmits the following detailsof his income for the assessment year 2013-14.

Income from salary 3,00,000 Loss from letout house proper ty 40,000 Income from sugar business 50,000 Loss from ironore business b/f 12,00,000 (discontinued in2004-05)

Shor t term capital loss 60,000 Long term capitalgain 40,000 Dividend 5,000 Income received from lottery winning(Gross) 50,000 Winning incard games 6,000 Agriculturalincome 20,000 Long term capital gain fromshares (STT paid) 10,000 Shor t term capital loss under section 111 10,000 Bankinterest 5,000

Calculate gross total income and losses to be carried forward.

Solution: Computationof income of X for the assessment year 2013-14

Salar y

Rs.

Businessincome

Rs.

Long-ter mcapital gain

Rs.

Income fromother sources

Rs. Salary

Business incomeLong-term capitalWinnings from lottery

3,00,000 - - -

- 50,000

- -

- -

40,000 -

- - -

50,000


18/22

410 DIRECT TAX

Winnings fromcard gamesBankinterestTotal Less: Current year lossesLoss from house proper tyShor t-term capital lossBalance

Less: Brought forward business lossNet income (Total: Rs.3,21,000)

- -

- -

- -

6,0005,000

3,00,000

40,000 -

50,000

- -

40,000

- 40,000

61,000

- -

2,60,000 -

50,00050,000

Nil -

61,000 -

2,60,000 Nil Nil 61,000

Mr. Rajat submits the following information forthe financial year ending31 st March, 2012. He desires thatyou should:

a. Compute the total income and

b. Ascer tain the amount of losses that can be carried for ward.

He has two houses: Rs.

House No. I-Income af ter all statutorydeductions 72,000

House No. II-Current yearloss (30,000)

He has three proprietary businesses:

TextileBusiness:

Discontinued from31 st October, 2011-Current yearloss 40,000

Brought forward business loss of the assessment year 2008-2009 95,000

Chemical Business:

Discontinued from1st March, 2010-hence no Profit/Loss NIL

Baddebts allowed in earlieryears recovered duringthis year 35,000

Brought forward business loss of the assessment year 2010-2011 50,000

Leather Business: Profit forthe current year 1,00,000

Share of Profit ina firm in whichhe is Par tner since 2002 16,550

a) Shor t-term CapitalGain 60,000

b) Long-term CapitalLoss 35,000Contributionto LIC towards Premium 10,000

Solutions:

Computationof total income

Rs.House proper ty income [see Note1] 42,000Business income [see Note2] Nil


19/22


Shor t-term capitalgain 60,000 Gross total income 1,02,000 Less: Deduction under section80C 10,000 Total income 92,000

Long-term capital loss of Rs.35000 will be carried forwardas per the provisions of section 70.

Notes:

The loss from house proper ty II will be set off against income fromhouse proper ty.

As all the three business carried on by Mr. Rajatare non-speculative, mutualset off of losses from are business against profit from another business is possible [Current years business income: - Rs.40,000 +Rs..35,000 + Rs.1,00,000 Rs.95,000, (brought forward loss: Rs.95,000 + Rs.50,000) ; Rs.1,45,000,loss of Rs.50,000 will be carried forward.

Long-term capital loss can only be set off against long-term capitalgain.

10.9 Change in the constitution of Firms Sec 78 Change in Constitution: Where there is a change in constitution of a firm, the firm shall not beentitled to carry forward, the deceased or retired partner s share of loss / depreciation.

The share of loss of the deceased partner in business loss, house property loss, capital loss or lossfrom the activity of owing or maintaining horses shall be disallowed.

Succession:

Where there is a succession of business other than by inheritance, the successor cannot set off predecessor s losses.

However if the succession is as per Sec 47(xiii)/(xiv), then set off and carried forward shall applysubject to the conditions specified

If any of the conditions are not complied with then losses already set off shall be deemed to be theincome of the year of violation

In view of provisions of section 78(2), loss suffered by an erstwhile par tnership firm inwhich assessee was a par tner, could not be set off againsthis individual income- PramodMittalvs. CIT [2012] 205 TAXMAN444 (Delhi).

State the factors to be borne in mind relating to carry forward and set off of losses in case ofchange in constitutionof firm or succession under section 710.

M/s. Vivitha &Co., a par tnership firm, with four par tners A, B, C and D having equalshares,furnishes the following details, summarized fromthe valid returns of income filed by it:

Assessment Year Item eligible for carry forward andset off 2011-12 Unabsorbed business loss Rs.1,20,0002012-13 Unabsorbed business loss Rs.1,90,000


20/22

412 DIRECT TAX

2012-13 Unabsorbed depreciationRs.1,20,0002012-13 Unabsorbed long-term Capitalgains:

-from shares Rs.1,10,000-from shares Rs.1,90,000

C whowas a par tner during the last three years, retired from the firm with effect from1.4.2011.The summarized results of the firm forthe assessment year 2013-14 are as under.

Rs. Income from house proper ty 70,000 Income from business: Speculation 2,20,000

Non-speculation (-)50,000 Capitalgains: Shor t-term (from sale of shares) 40,000 Long-term (from sale of building) 2,10,000 Income from other sources 60,000

Brieflydiscuss how the items brought forward from earlieryears can be set off inthe hands of the firmforthe assessment year 2013-14, in the manner most beneficial to the assessee. Alsoshow the items to becarried forward. Computationof total income is not required.

Solution:

Particulars Broughtforwardlosses

Share of retiring partnerC in losses (i.e., amountof brought forwardloss

which cannot be adjustedas per section 78)

Balancelosses

which canbe

adjusted

Unabsorbed business loss (assessment year 2011-12)Unabsorbed business loss (assessment year 2012-13)Unabsorbed depreciation(assessment year 2012-13)

Unabsorbed long-term capitalgains (assessment year2012-13):FromsharesFrom building

Rs.1,20,0001,90,0001,20,000

1,10,0001,90,000

Rs. 30,000 47,500

Nil (unabsorbed depreciation by provisions of section

78)

27,500 47,500

Rs. 90,000

1,42,500 1,20,000

82,500 1,42,500


21/22


Particulars

Income ofassessmentyear 2012-13

Income avail-able for set off of broughtforwardLosses

Adjustmentof broughtforward losses

Incomechargeableto taxforassessmentyear 2012- 13

Rs. Rs. Rs. Rs.

Income fromhouse proper ty

Income from business:

Speculation Non-speculation

CapitalgainsShor t-term (from sale ofshares)Long term (from sale of

building)

Income from other sources

70,000

2,20,000(-)50,000

40,000

2,10,000

60,000

70,000

1,70,000

Nil

2,10,000

60,000

70,000(unabsorbeddepreciation)

1,70,000 (Rs.90,000 businessloss of assessment year2011-12 is fully adjustedandRs.80,000 business loss ofassessment year 2012-13 isadjusted)

-

210000 (Rs.1,42,500unabsorbedLTCGfrom buildingis fully adjustedandRs.67,500 of unabsorbedLTCG of shares is adjusted)50,000

Nil

Nil

40,000

10,000

The followinglosses are to be carried forward:

Unabsorbed business loss of assessment year 2011-12: Rs.62,500

Unabsorbed LTCGon shares of assessment year 2011-12: Rs.15,000

10.10 Carry forward and set off in the case of companies in which public arenot substantially interested Sec 79 Where a change in share holding has occurred in a company in which public are not

substantially interested, then losses can be carry forward and set off only if: Not less than 51% of the share holding, on the last day of previous year in which the loss was incurred and on the last day of the previous year in which it is to be set off, are held by the same persons.


22/22

414 DIRECT TAX

The above provisions shall not apply if there is a change in constitution consequent upon: Death of a share holder Transfer by way of gift to any relative Change in share holding of an Indian company which is a subsidiary of a foreign

company due amalgamation or demerger of a foreign company provided:51% of the shareholders of the amalgamating or demerged foreign company continueto remain the share holders of the amalgamated or resulting foreign company.

Documents

135972720610_Set Off and Carry Forward