Set-off & Carry forward of losses Ranjan Kumar Bhowmik ru Ex-Member National Board of Revenue [1] Introduction An assessee may have multiple sources of income. It is very common that loss will not generate from each head. Thus, losses from one head may be adjusted with income from other heads $0 that net figure results income and tax can be imposed on it. However, if the total income from all heads results losses, set-off cannot be done. In such a situation, loss of one year can be carried forward to subsequent year or years for set off. ‘Set-off and cary forward of losses is practically significant to compute total taxable income and these are the benefits enjoyed by assessees to cover up their losses before paying taxes to the govemment. Set-off means the coverage of loss under one head against another head in a specific year. Carry forward is the transferring of loss of one year to the succeeding year or years for coverage if set-off was not possible or insufficient. Such set-off and carry forward facility can be availed provided that certain conditions are futfiled. After carry forwars, tosses from any head canr«i be set-off against income from any other heads and losses cannot be carried forward for unlir-sied period. This paper presents these two issues in detail. a) Setoff b) Cary forward and then set-off [2] Set-off of losses Where, in respect of any assessment year, the net result of computation of income under any head is a loss, the assessee shall, subject to certain exceptions, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. Loss sustained in any year under one head should be set-off against income under another head in that year in order to arrive at the true total income of the assessee. If after setting off losses against income under the same head the net result is still a loss, such loss may be set-off against income of the same year under any other head. Second proviso of ‘section 37 provides that in computing any loss to be set-off any subsidy received in cash shall be deducted from the loss and the resulting loss only shalll be set-off.The table produced below may be used as a short-cut guideline for set-off of losses: u Reference | oss Restrictions to Set-off against ‘section 7. Business loss Ti] income from house property Section 37 (3 proviso) | [2] Capital Gain ‘Section 37 (1* proviso) [3] Business income as per provision of section | Section 308 308 on disallowances under section 30 2 Speculation [iLAny income. business loss [2] Set-off is only possible if there is Income from another speculation business 3. Capital loss [1] Any income. Section 37 [2] Set-off is only possible if there is another | (1* proviso) capital gain during the year Agricultural toss Capital gain Section 41 5. Loss at tax-free | Any taxable income Section 37 income. (1* proviso) @ Loss at any head | Anyincome Section where minimum tax 82C(2)(e) u/s 82C is applicable 7. Loss under any head | Tobacco manufacturing business income ‘Section 37 (4 proviso) &. Loss at any income | Set off not allowed against any income ‘Section 37 | where reduced tax (1% proviso) | rate is applicable ___IRef: Finance Act,2024] | [3] Carry forward of losses Camry forward is the.transferring of loss of one year to the succeeding year or years for coverage if set-off was not possible or insufficient. There are 4 types of losses which can be carried forward for set-off against the same heads of income. These are: [1] Business loss [Section 38] [2] Speculation business loss [Section 39] [3] Capital loss [Section 40] [4] Agricultural loss [Section 41] There is no provision of carry forward of the following losses: [1] Salary loss [Though salary loss is not possible] [2] Loss from interest on securities [3] House property loss [4] Loss under the head ‘income from other sources’ [4] Carry forward of business loss and unabsorbed depreciation allowances [Section 38] If business Joss cannot be set-off under section 37 because of the absence of inadequacy of income under any other head, it may be carried forward and set-off against the profits of a subsequent year. The right of carry forward of business loss is subject to the following restrictions: {a] Loss cannot be carried forward beyond 6 successive years.{iamever as per section 42(6) unabsorbed depreciation allowances can be carried forward to any sequent year without any time limit, The unabsorbed depreciation Is deemed to be part of the fepreciaton allowance for a subsequent year and will enter into the computation of the income of such subsequent year. Loss during the tax holiday period ca mentioned at section 4688 (9) and 4660 (7) nnot be carried forward beyond the tax holiday period as {] Loss may be carried forward and set-off against the profits and gains of the same business Or profession as that in which the loss was incurred. {c] The business or profession in which the loss was originally sustained should continue to be Carried on by the assessee in the year in which the carried forward loss sought to be set off, Income from business or profession which has been discontinued at any time before the commencement or during the courses of the said income year shall be chargeable to tax under Section 19(6) of 170.1984 and the business shall be deemed to have been carried on during the Yar. But no provision has been made for set-off of unabsorbed loss carried forward in that year, ‘The tight of carry forward is stil condi was incurred. This condition neces: the assessee in a subsequent year: tional upon the continuance of business in which the loss sarily involves the question whether a business carried on by is the same as the business in which the loss was incurred, ‘The right of carry forward and set-off of losses continues only so long as the business continues, The right would be lost if the business ceases to be carried on. Therefor, if the business is discontinued by the assessee, the loss which has been carried forward can=ci be set-off against the profits of any other business even if such other business was also carries on by the assesses atthe time when the loss was incurred. (CIT vs. international Industries Ltd. [1952] 22 ITR 44] {d] The toss can be carried forward and set-off only against the profits of the assessee who incurred the loss. The person who incurred the loss alone has the right to carry forward the same: {and the successor in business cannot claim-to carry forward the loss incurred by the predecessor in business. The only exceptional case is that of succession by inheritance as mentioned at section 42(4) of ITO, 1984, [5] Carry forward of speculative business losses [Section 39] ‘Speculative business is defined at section 2(61) where speculative transections cartied on by an assessee are of such a nature as to constitute a business; the business is regarded as speculation business. If speculative business loss cannot be set-off under section 37 because of the absence or inadequacy of income under the same head, it may be carried forward and set off against the speculative business profits of a subsequent year. The right of carry forward of business loss is subject to the following restrictions: [a] Loss cannot be carried forward beyond 6 successive years. [b] Loss in a speculation business can be carried forward against the profits of any speculation business carried on i speculation business in which the loss had been incurred. to a subsequent year and set-off only in that year, even if the profits are of a Sevof carry frwardofloses Handout prepared by Raton Kumar Bhownk uu x Memiber NOR avon PN/UTEODT Paget© losses the right of carry forward of loases in speculation business onky ness continues. Tha right would be lost if the speculation business {c] Like other busines 16] Carry forward of Capital loss (Saction 40] If an assessee invests in a capital asset but sells it at a lower amount within the year to another person the loss would be considered as capital loss, He has neither the right to set-off such loss ‘against Income under any ather head in the same year nor he has the right to carry forward against for set-off against any business Income of a subsequent year, while a business has both the rights. cannot be set-off under section 37 because of the absence or inadequacy of gain me head, it may be carried forward and set-off against the capital gain of 2 subsequent year. The right of carry forward of capital loss is subject to the following restrictions: [a] Loss cannot be carried forward beyond 6 successive years. {b] Capital loss can be carried forward to a subsequent year and set-off only against the capital gain in that year. [c] In the case of any assessee, the net loss relating to capital asset cannot be carried forward in any case if the loss does not exceed Tk. 5,000. And where it exceeds Tk.5,000 only so much of ‘such loss shall be carried forward as exceeds Tk.5,000. [71 Carry forward of Agricultural loss [Section 44] {f agricultural loss cannot be set-off under section 37 because of the absence or inadequacy of income under any other or the assossee has only income under the head ‘capital gain’ such loss may be carried forward and set-off against the agricultural income of a subsequent year. The right of carry forward of agricultura’ oss is subject to the following restrictions: {2] Loss cannot be carried forward visyond 6 successive years, [b] Agricultural toss can be carrie! forward to a subsequent year and set-off only against the agricultural income in that year. [8] Carry forward of Partnership firm’s losses [Section 42] In the case where the assessee is a firm, tax is levied on the fim directly as a distinct unit of assessment. Any loss incurred by a fim may be set-off during the year by the firm itself against its income from any other head and unabsorbed loss may be carried forward by the firm for set-off against its profit in a subsequent year but no individual partner has the right to set-off his share of the firm's loss against his own income nor he has the right to carry forward his share of the firm's Joss. Generally, the successor in business cannot claim to carry forward and set-off the loss of his predecessor. The exception is the case where the succession is by inheritance. The heir would be entitled to carry forward the loss incurred by the previous owner. The same principle is applicable for partnership firm also. The firm shall not be entitled to carry forward and set-off so much of the 408s proportionate to the share of a retired or deceased partner. Sources: [1] Income Tax Ordinance, 1984 [2] Court case references Se iia