Set-off & Carry forward of losses 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 50 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. ‘Setoff and carry 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 government. 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 fulfilled. After carry forward, losses from any head cannot be set-off against income from any other heads and losses cannot be carried forward for Unlimited period. This paper presents these two issues in detail a) Setoff b) Carry forward and then setoff [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 stil 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 shall be set-off Setaff& carry forward of ose and out prepared by Ranjan Kamar Ohownik own Ex-Member, NBR as on 21/6/2022 ®The table produced below may be used as a short-cut guideline for set-off of los: T Loss | Restrictions to Set-off against 1. Business loss [1] Income from house property ‘Section 37 (3 proviso) [2] Capital Gain ‘Section 37 | (1 proviso) TS] Business income as per provision of section | Section 30B 308 on disallowances under section 30 2. Speculation [Any income. ‘Section 37 | business loss [2] Set-off is only possibie i there is income from | (1* proviso) another speculation business 3 Capital oss [i]Any income. Section 37 | [2] Set-off is only possible if there is another | (1* proviso) capital gain during the year 4, Agricultural loss Capital gain Section 41 Loss at tax-free | Any taxable income Section 37 income (1* proviso) 6 Loss at any head | Any income Section Where minimum tax 82C(2)(e) |__u/s 82C is applicable |7- Loss under any head | Tobacco manufacturing business income Section 37 zee (4” proviso) Loss at any income | Set off not allowed against any income Section 37 where reduced tax (1* proviso) __rate is applicable [Ref: Finance Act,2024} [3] Carry forward of losses 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. 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 loss 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 assessment years. Setoff & carry forward oflosses Hand ost Member, NBR axon 21/8/2022 Page?However as per section 42(6) unabsorbed depreciation allowances can be carried forward to any ‘subsequent year without any time limit. The unabsorbed depreciation is deemed to be part of the depreciation allowance for a subsequent yer and will enter into the computation of the income of ‘such subsequent year. Section 42(7) requires that losses which have been carried forward from past years should first be set-off against business profits and if any balance of profits still remains, then unabsorbed depreciation allowances of past years can be carried forward under section 42(6) for set-off ‘against such balance of profit. The similar guideline given at 3" schedule [para-9(2)] In @ scheme of amalgamation, the amalgamated company shall have the right to carry forward the accumulated loss and the unabsorbed depreciation of the amalgamating company in the income year in which the amalgamation took place as mentioned at section 42(8). Loss during the tax holiday period cannot be carried forward beyond the tax holiday period as mentioned at section 46BB (9) and 46CC (7) In case of startup sandbox, loss in any growth year can be carried forward up to 9 successive assessment years as per section 111A(3) Ib] 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, [e] 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 ITO, 1984 and the business shall be deemed to have been carried on during the year. But no provision has been made for set-off of unabsorbed loss carried forward in that year. The right of carry forward is still conditional upon the continuance of business in which the loss was incurred, This condition necessarily involves the question whether a business carried on by the assessee in a subsequent year 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. Therefore, if the business is discontinued by the assessee, the loss which has been carried forward cannot be set-off against the profits of any other business even if such other business was also carried on by the assessee at the time when the loss was incurred. [CIT vs. International Industries Ltd. [1952] 22 ITR 44] [4] The loss 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 land the successor in business cannot ciaim 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 carried on by an assessee are of such a nature as to constitute @ business; the business is regarded as speculation business. If speculative business loss cannot be set-off under section 37 because of the absence of 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. Sevoff & cary forwardoflosses Hane our prepared by Rarjan Kumar Bhowmicrova Ex-Member, NOR ason 21/8/2022 Page3 @{[b] Loss in a speculation business can be carried forward to a subsequent year and set-off only against the profits of any speculation business carried on in that year, even if the profits are of a ‘speculation business in which the loss had been incurred. Ic] Like other business losses the right of carry forward of losses in speculation business only so long as the speculation business continues. The right would be lost if the speculation business ‘ceases to be carried on, 6] Carry forward of Capital loss [Section 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 other 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. If capital loss cannot be set-off under section 37 because of the absence or inadequacy of gain Under the same head, it may be carried forward and set-off against the capital gain of a 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. [bp] Capital loss can be carried forward to a subsequent year and set-off only against the capital gain in that year. Ic] 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, [7] Carry forward of Agricultural loss [Section 41] If agricultural loss cannot be set-off under section 37 because of the absence or inadequacy of ineome under any other or the assessee 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 agricultural loss is subject to the following restrictions: [a] Loss cannot be carried forward beyond 6 successive years, [b] Agricultural loss can be carried forward to a subsequent year and set-off only against the agricultural income in that yeer. [8] Carry forward of Partnership firm's losses [Section 42] In the case where the assessee is a firm, tax is levied on the firm 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 loss, 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 principie is applicable for partnership firm also. The firm shail not be entitled to carry forward and setoff so much of the loss proportionate to the share of a retired or deceased partner. Sources: [1] Income Tax Ordinance, 1984 [2] Court case references The End by Ranjan Kumar Bhowmik su Ee-Member. NBR ason21/8/2022 Page