The Hindu Business Line : Laws relating to losses

Basically, each head caters to a particular source of income and the expenses incurred on each of the sources are dealt with distinctly and separately. Consequently, the effective rates of taxes for the different heads of income vary.

The position of losses arising under the respective heads of income, such as property income, business income and so on, have been separately dealt with in Chapter VI of the Act.

Losses have to be dealt with in two parts:

i) loss in the same year and manner of set off in the same year; and

ii) manner and carry forward of losses and set off in the future years.

Over the last decade or so, the process of set off has become difficult to comprehend.

Picture of losses

The Table shows the process of set off of loss in the same year, carry forward of losses and the time limit thereon. Obviously, without proper reference it is difficult to fathom the exact position of loss under each head of income.

Issues

First and foremost there is a clamour to revisit the concept of `speculative transaction' by reviewing the definition contained in Section 43(5). With the development of innovative financial instruments, the requirement of physical delivery as criteria to define speculative transaction is not only irrelevant but also dated, it is said.

The report of the Task Force on Implementation of the FRBM Act, which was submitted in July 2004, had recommended thus: "The present distinction between speculative transactions and non-speculative transactions should be totally dispensed with insofar as they relate to shares and securities."

As a result, trading in derivatives was removed from the ambit of speculation from April 1, 2006.

The second issue relates to prevention of long term capital loss being set off against short term capital gains in the year of incurring the loss, particularly for listed security. One may note that short term capital gain for a listed security is taxed at 10 per cent, whereas short term capital gain for other assets is taxed at 20 per cent.

The argument of long term capital loss being denied the benefit of set off against short term capital gain was valid when short term capital gains were being taxed at normal rates. But today, in view of the lowering of short term capital gain rate to 10 per cent, this restriction is misplaced and needs to be removed, it is demanded.

Finally, while unabsorbed depreciation can be carried forward without any time limit, unabsorbed business losses have to be set off within eight years.

The Report of the Task Force had stated that "... unabsorbed depreciation would be merged with business loss and lose its separate identity. This would impart considerable administrative simplicity since it would not be necessary to maintain year-wise break-up of the brought forward losses to determine the set off priority."

Thus, one more demand for simplification of the law relating to set off of losses is that unabsorbed business losses be treated akin to unabsorbed depreciation.

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