The Hindu Business Line : Complexities in set-off and carry-forward

As per law, a taxpayer suffering loss from a source in a year is eligible to set off such loss against income from any other source or any other head of income.

V. K. Subramani

An assessee having taxable income has to arrange his affairs in such a manner that his tax liability is optimal taking advantage of the legally recognised sources of saving, investment and income. A taxpayer may establish his business in special economic zones (SEZs) to enjoy Section 10AA benefit. Alternatively, he may carry on an eligible business for getting tax relief under Section 80-IA or Section 80-IB.

As per law, a taxpayer suffering loss from a source in a year is eligible to set off such loss against income from any other source or any other head of income.

This write-up takes a snapshot of the set off and carry forward provisions in the realm of income-tax law.

Inter-source adjustment

A taxpayer having income from one house property and having loss from another can set off such loss against income and offer the balance to tax. Similar inter-source adjustment is available for business income and capital gains.

The exception to the inter-source adjustment relate to: (i) long-term capital loss which can be set off only against long-term capital gain; (ii) loss from speculation business to be set off against speculation income; and (iii) loss from the activity of owning and maintaining racehorses to be set off only against profit from the same activity.

Inter-head adjustment

Where the taxpayer has loss under any head of income such loss can be set off against income under the head ‘capital gains’. The capital gain could arise from a short-term/long-term capital asset. There is no distinction for setting off the loss under other heads of income against capital gains.

Where the assessee has loss from business or profession it cannot be set off against income assessable under the head ‘salaries’.

However, unabsorbed depreciation of business or profession could be set off against salary income. Divergent views exist on the set off of depreciation against salary income.

Where the assessee has loss under the head ‘capital gains’, such loss cannot be set off against other heads of income.

However, in inter-source adjustment the long-term capital loss cannot be set off against short-term capital gain. Conversely, short-term capital loss can be set off against long-term capital gain.

Carry forward and set off

Loss from house property shall be set off against any income of the same assessment year. However, once the loss is carried forward to subsequent year it is eligible for set off only against income from property. It cannot be set off against other heads of income. Loss from house property can be carried forward for eight assessment years for set off against property income.

Loss from business can be carried forward for set off against income from business in the subsequent years. Even discontinued business loss can be carried forward for set off against other business incomes.

The maximum period for carry forward of business loss is eight assessment years succeeding the assessment year in which the loss was first computed. The only exception is in respect of speculation business loss which can be set off only against speculation income.

Where the assessee has unabsorbed depreciation and brought forward business loss, priority shall be given to the business loss for set off. The unabsorbed depreciation can be carried forward indefinitely, whereas the business loss can be carried forward only for eight assessment years. Hence, the priority of set off to business loss than brought-forward depreciation.

Any capital loss carried forward is eligible for set off benefit for eight assessment years succeeding the assessment year in which the loss was first computed.

In respect of losses in speculation business, it is eligible for carried forward and set off for four assessment years succeeding the year of loss.

It may be noted that loss from regular business is eligible for set off against profit from speculation business. The statutory embargo is only on set off of speculation business loss against other incomes.

Amalgamation

Where there is amalgamation of (i) a company owning an industrial undertaking, ship or hotel with another company; or ii) a banking company with a specified bank; or iii) a public sector company engaged in operation of aircraft with one or more public sector company or companies engaged in similar business, the accumulated loss and unabsorbed depreciation of the amalgamating company will be eligible for carry forward and set off by the amalgamated company.

For the assessment year 2008-09, the benefit of carry forward and set off of accumulated loss and unabsorbed depreciation has been extended to co-operative banks too. The succeeding co-operative bank is eligible for set off and carry forward of losses of the predecessor co-operative bank.

Change in shareholding

In the case of closely-held companies if there is change in voting power of not less than 51 per cent on the last day of previous year, the loss brought forward by the company is not eligible for set off.

The year in which the loss was incurred and the shareholding pattern would be compared whenever the set off is contemplated. On comparison, if the composition of shareholding had undergone change of not less than 51 per cent, then the brought-forward loss would not be eligible for set off.

Loss returns

Taxpayers having loss under the head (i) income from business or profession; (ii) speculation business loss; (iii) loss under the head capital gains; or (iv) loss from the activity of owning and maintaining race horses, have to file returns in accordance with Section 139(3) so that the losses can be carried forward to subsequent years for set off.

(The author is an Erode-based chartered accountant.)