Applied Taxation

ACCT 370

Rabia Saleem
Session # 16 - 18
Today’s Session

• Losses - set off and carry forward

• Group Relief

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Loss – Chapter III (Tax on Taxable Income), Part VIII

• “Income” includes loss of income

[S. 2(29)]

• Loss in a tax year is the excess of total deductions under a head of

income over the amounts chargeable to tax under that head
[S. 11(3)]

• A loss for a head of income for a tax year shall be dealt with in
accordance with Part VIII of Chapter III (Tax on Taxable Income) of the
ITO,2001 [S.11(4)]

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How can losses be dealt?

1. Set off losses

2. Carry forward losses including:
 Unabsorbed depreciation
 Amalgamation
 Group relief

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Set-off Losses – Section 56

• Loss under any head of income except capital loss and speculation loss
can be set off against any other head of income.
• Speculative Loss – section 19 – Speculative Business
Any business in which contract for the purchase or sale of a commodity is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the commodity.

• Loss cannot be adjusted against:

• Salary Income
• Income taxable under Final Tax Regime (FTR)

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Set-off Losses – Illustration
Mr. Ahmed has declared his income/loss for the current tax year as under:
• Business loss – Rs.900,000
• Taxable Income from salary– Rs.1,200,000
• Taxable other source – Rs.800,000
Compute his taxable income for the current year.

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Set-off Losses – Other considerations

• Loss under business shall be set off last i.e. priority of set-off shall be given to
losses other than business loss.

• Speculation loss cannot be set off against any non-speculative income. However,
any non-speculative loss (other than capital loss) can be set off against
speculative gain. Same principle is applicable for capital gains.

• It is considered opinion that if an activity is wholly exempt then loss under this
activity cannot be adjusted against any taxable activity. i.e. loss under agricultural
income cannot be adjusted against any taxable activity.

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Carry forward losses – section 56(2)

Following losses can only be carried forward:

• Business losses [S. 57 & 57A]

• Speculation losses [S. 58]

• Capital losses [S. 59]

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Head-wise situation of carry forward of losses

Heads of Income CARRY FORWARD PROVISIONS

Salary • Loss cannot arise under the head Salary

• Any other loss cannot be adjusted against salary income

Income from Property • Loss in a tax year can be set-off against any other head of income other
than salary, and FTR.

• Any unadjusted loss under the head income from property cannot be
carried forward.

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Head-wise situation of carry forward of losses
Head of Income Carry forward Provisions

Other Source • Loss in a tax year can be set-off against any other head of income other
than salary, and FTR.

• Any unadjusted loss under the head other sources cannot be carried
forward.
Capital Gains Section 37
• Capital loss can be carried forward only against future capital gains up
to 6 years next following the tax year in which the loss occurred.

Section 37A
• Loss on disposal of securities under section 37A (shares of a public
company etc.) shall be set off only against the gain from any other
securities under section 37A and any unadjusted loss shall be carried
forward to 3 subsequent tax years only against gains under section
37A.

• Loss under section 37 can be adjusted against taxable capital gain

under section 37A.

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Head-wise situation of carry forward of losses
Heads of Income Carry forward provisions

Speculation Business • Speculation loss can be carried forward only against future
speculation gains up to 6 years next following the tax year in which
the loss occurred.

Normal Business • Normal business loss in a tax year can be adjusted against any head
of income other than salary and FTR but it can be carried forward
only against future business income up to 6 years next following the
tax year in which the loss occurred.

• Loss in hotel business by a resident company in the tax year 2021 and
onwards shall be c/f up to 8 years next following the tax year in
which the loss occurred.

• In case of public company registered in Pakistan, operating hotels in

Pakistan, Gilgit Baltistan and AJK then it can be adjusted against
profit in hotel business in Pakistan, GB and AJK –S.56A

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Set-off & Carry forward losses – Illustration
Tax year 2021 – Taxable other source 2,000,000
Normal Business loss 3,800,000

Tax year 2022 – Taxable other source 2,400,000

Business income 1,100,000

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Losses: Unabsorbed depreciation, amortization of
intangibles, pre-commencement expenditure

• Tax depreciation: for excess of tax depreciation giving rise to business loss, normal rules for set-off
and c/f shall apply except that there is no time limit for the purpose of c/f of this amount.

• Where taxable income of a tax year is Rs.10million or more then unabsorbed depreciation and
amortization shall be adjusted against 50% of the taxable income for that year after adjusting any
b/f normal business loss.

• Depreciation and amortization for the tax year shall be set off last.

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Losses: Unabsorbed depreciation, amortization of
intangibles, pre-commencement expenditure adjustment
The sequence of adjustment will therefore be as under:
Item sequence
Taxable Income of year 2 before tax depreciation and amortization xxx
Less: Income other than business income (xxx)
xxx
Less: Normal business loss b/f from year 1 (xxx)
Balance business income xxx
Less: Unabsorbed depreciation and amortization of year 1 (xxx)
xxx
Less: Tax depreciation and amortization of year 2 (xxx)
Taxable business income xxx
Add: Income other than business income xxx
Taxable Income xxx

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Illustration
A Limited’s business loss of year 1 was Rs.20,000,000 including unabsorbed depreciation of Rs.12,000,000.
The company’s taxable income before depreciation in year 2 is Rs.28,000,000 including income from other source
Rs.1,500,000. Tax depreciation of year 2 is Rs.8,200,000. Compute taxable income if any, and the amount of loss carried forwards by the
company in year 2.

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Business loss with reference to Amalgamation – S.57A

• Amalgamation means merger of banking companies, non-banking financial institutions, insurance

companies or companies owning industrial undertakings or providing services (not being a trading
company) to takeover all assets and liabilities – s.2(A)

• One of the companies must be a public company and the scheme of amalgamation shall be approved by
SBP, SECP or any court.

• Amalgamating company is a company which is being merged with another company.

• Amalgamated company is the company which is taking over the assets and liabilities of the
amalgamating company.

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Business loss with reference to Amalgamation – S.57A

• Assessed Loss
• For the tax year of amalgamating company shall be set-off against business income of amalgamated company
and vice versa in the year of amalgamation.
• Unadjusted loss c/f up to 6 years following the tax year in which the loss occurred. No limit time to unabsorbed
depreciation (such to 50% restriction discussed above).

• Amalgamated company shall continue the business of amalgamating company for atleast
5 years from the date of amalgamation.

• Expenditures occurred by amalgamated company on legal and financial advisory services

and other admin costs relating to planning and implementation of the amalgamation are
allowable.

• If any conditions laid down by SBP, SECP or any court are not fulfilled subsequent to
adjustment of loss then the same shall be reversed in the year in which such default is
discovered by tax authorities.

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Group Taxation as single fiscal unit – s.59AA
• 100% owned group of companies locally incorporated under the Companies Act may be taxed as
a single fiscal unit, provided an irrevocable option is exercised to be taxed as a group.

• Losses incurred by any of the group companies will be off-set against income of other group companies.

• Consolidated group accounts are required.

• Group taxation relief will not be available to losses prior to formation of the group. It means losses b/f if any will be
lapsed.

• Following benefits shall be available:

• Intercorporate dividend income
• Taxation of group dividend
• Taxation of intercorporate profit on debt

• All companies in the group shall comply with specified corporate governance requirements and group designation
rules

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Procedure for Group Taxation u/s59AA
Rule 231 of Income Tax Rules 2002
i. Holding company owns 100% of the subsidiary company

ii. Holding company and each of its subsidiary shall make separate application containing declaration of irrevocable option for group
taxation to the Commissioner in the prescribed format.

iii. Holding company and subsidiary shall furnish certificate issued by SECP verifying compliance with the Code of Corporate Governance

iv. Return shall be prepared as one fiscal unit under the name of the holding company. Group return, audited accounts of each
company shall be attached.

v. Subsidiary companies shall furnish their returns in their respective tax jurisdiction along with application for group taxation.

vi. Taxation matters relating to the period prior to this option to be continued with the commissioner having jurisdiction over the
subsidiary company.

vii. No effect shall take place for group taxation during the year of disposal of a subsidiary.

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Procedure for Group Taxation u/s59AA
Rule 231 of Income Tax Rules 2002
• Each company shall file independent tax withholding statements as required.

• All companies opting for single fiscal unit shall have the similar accounting period for computation of income.

• The transactions by any company within the group and its associated companies shall be carried out and recorded on arm’s length
basis.

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Group Relief – Sec.59B
• A subsidiary company may surrender its assessed loss as per the formula below
(excluding b/f loss and capital loss) for the tax year in favour of its holding company or its subsidiary or any
other subsidiary of the holding company. The holding company shall directly hold share capital of the
subsidiary company as under:

- One of the companies in the group is listed in Pakistan shareholding 55% or more
- None of the companies in the group is listed in Pakistan shareholding 75% or more

• Loss is computed as follows:

• (A/100) x B
A is the % share capital held by the holding company of its subsidiary
B is the assessed loss of the subsidiary company

In simple terms it means if the holding company has 80% shares in a subsidiary then 80% of the assessed loss
can be surrendered by that subsidiary company.

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Group Relief – Conditions
• Loss surrendered by the subsidiary company may be adjusted by the holding or subsidiary company
against its business income in the tax year and the following two tax years.
• Any unadjusted loss shall revert to the loss surrendering company and shall c/f in the normal way.

• GR subject to following conditions:

i. Continued ownership of 5 years of share capital of the subsidiary company.
ii. Trading company within group shall not be entitled to avail group relief.
iii. If holding company is a private company it is required to be listed within 3 years from the year in which
loss is claimed.
iv. Group companies are locally incorporated under Pakistani law.
v. BODs approval of both companies is required.
vi. The subsidiary continues the same business during the said period of 3 years.
vii. All companies in the group shall comply with specified corporate governance requirements.
viii. Subsidiary company cannot surrender its assessed losses for more than 3 tax years.

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Group Relief – Conditions (contd.)
• The tax relief availed will be reversed if holding company’s equity interest falls below 75% as a
consequence of disposal of shares during the stipulated 5 years.

• Loss claiming company on approval of its Board may transfer cash to loss surrendering company equal to
amount of tax saving in this respect.

• Intercorporate dividend income within the group companies entitled to group relief shall be exempt.

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