Set off and Carry Forward 393

1
1
0
0







RELEVANCE 3 %
DEVOTION 1 HOUR


SET OFF
AND CARRY
FORWARD











HISTORICAL RELEVANCE

12

10

8

6

4

2

0
May Nov May Nov May Nov May Nov May Nov May
07 07 08 08 09 09 10 10 11 11 12


Marks
394 DIRECT TAX




Set off and Carry Forward




Sectionwise Overview:

Section Particulars Page No.

70

Intra Head adjustment

395
71 Inter head adjustment 397
71B Carry forward and set off of loss from house proper ty 398
72 Carry forward and set off of business losses 399
72A Amalgamation/ Demerger/ Business reorganization 400

72AA Amalgamation of a banking company with
a banking institution
402
72AB Business reorganization of co operative banks 402
73 Speculative losses 403
73A Losses of Specified Businesses 398
74 Capital loss 398
74A Loss from owning and maintain horses 398
78 Change in constitution of the firm 409
79 Carry forward and set off of loss of closely 411
held companies
94(7) Dividend Stripping Transactions 396
94(8) Bonus Stripping Transactions 396
Set off and Carry Forward 395




FORTUNES in life keep changing and the possibility of earning income from different sources
is by no means an exception to it. In other words, a person may earn income from a particular
business in the current year, end up making a loss the next year, so on and so forth. When
such a situation arises what are the tax implications on the same? How would you adjust losses
from one source with the gains of another? Is it possible to set off losses from one head of income
with gains of another? What happens if your losses are more than your incomes? These and many
more issues pertaining to treatment of losses would be clarified in the next few pages of this
chapter.
As we all know, the only source from which you can never have a loss is Income from Salaries-
that apart every other head of income be it Capital Gains, Business or Professional Income,
Income from House Property or Income from Other Sources has a probability of making losses.
Hence the relevance of this chapter is well understood.
The entire chapter, comprised within Sec 70-79, deals elaborately on all possible issues pertaining
to Set Off and Carry Forward including succession of business. Lets now look into each of these
sections in detail.


10.1 Set Off of Current year Losses :- Sec 70 and 71
Set off of losses can be studied from two perspectives namely:
Set off under the same head of income Sec 70 (Intra-head adjustments)
Set off of losses from one head against any other head of income Sec 71 (Inter-head
adjustments)


10.1.1 Set off under the same head of income Sec 70:
Where an assessee incurs loss from any source of income falling under any head of income other
than Capital Gains he can set off such loss against his income from any other source under the
same head of income
For example: If an assessee has 2 businesses namely selling wood and selling rubber and
he earns a profit of Rs 50k from wood and incurs a loss of Rs 30k from rubber he can set off the
loss from rubber business against the profit earned in wood. Hence his net business income will
be Rs 20k.


Exceptions:
Loss from a specified business referred to in section 35AD
Loss from a specified business can be set off only against income from a specified
business - Sec 73A
Capital Losses:
Short term capital loss can be set off from any Capital Gains (long term or short term)
Long term capital loss can be set off only from Long term Capital Gains
Loss from Speculative business- Sec 73:
Loss from a speculative business can be set off only against income of another speculative
business





396 DIRECT TAX


Set off and Carry Forward 397




Business loss from any other business (non speculative) can be set off against speculative
business profits
Loss from owning and maintaining horses- Sec 74A:
Loss from this activity can be set off only against income from this source
Loss on account of lottery/card games etc:
No loss, expenditure or allowance is allowed from winnings from lotteries or crossword
etc
No loss from this source of income is allowed to be set off from any other source of
income
Losses from exempted sources of income cannot be set off from a taxable income
Dividend Stripping Transactions - Sec 94(7): Losses incurred by an assessee, to the extent
of dividend, shall not be allowed for set off / carry forward where a person:
acquires any unit or security within 3 months prior to the record date and
sells or transfers
such unit within 9 months after the record date or
such security within 3 months after the record date and
dividend or income from such unit or security is exempt.

For example - Mr A had acquired units of Religare Mutual Fund on1 st of January for Rs 50
per unit. Subsequently on 3rd of March Religare declared a dividend of Rs 10 per unit. Mr A
then sold his holding at Rs 45 per unit on 15th of March. Would your answer change if Mr A
had sold the unit for Rs 35.

In this case, since Mr A had acquired the unit within 3 months before the record date and had
transferred the same within 9 months from the record date, the provisions of Sec 94(7) shall
apply to the transaction.

Total dividend recieved Rs 10

Case 1:

Loss on sale of unit : Rs 5 (Rs 50-45)
According to Sec 94(7), losses to the extent of dividends recieved shall not be eligible for set
off. Since the loss is lower than the dividend recieved, the entire loss shall be disregarded.

Case 2:

Loss on sale of unit : Rs 15 (Rs 50-35)
According to Sec 94(7), losses to the extent of dividends recieved shall not be eligible for set
off. Therefore losses in excess of the dividend recieved shall be eligible for set off.

Hence in this case Rs 5 being excess of loss over dividend recieved, shall be eligible for set
off.



398 DIRECT TAX





Bonus Stripping Transactions Sec 94(8): Where a person
Acquires any units within 3 months prior to the record date and
Such person is allotted bonus /additional units without any payment and
Transfers such unit, while continuing to hold all or any of the additional units, within a
period of 9 months from the record date.
then, losses incurred on purchase and sale of such units shall not be allowed.
Amount of loss ignored shall be considered as the cost of acquisition of the additional units




Speculative Transaction 43(5): Transaction involving a contract for purchase and sale of
commodities including stocks and shares, which is periodically or ultimately, settled other
than by actual delivery or transfer of commodities or scrips.
Exceptions: A contract entered into to guard against loss due to price fluctuations (hedging contracts) in
the following cases:
Raw materials in the normal course of business
Stocks and shares entered by dealer or investor
Member of a forward market or stock exchange in the course of jobbing or arbitrage.
Transfer of Derivatives is not a speculative transaction provided:
It is carried out electronically on screen based systems through registered brokers/ sub brokers/
intermediary
Transaction would be supported by a Time Stamped Contract Note issued by such broker/ sub
broker/ intermediary indicating the Unique identification number and PAN no.
The provision of Sec 70 shall apply even to clubbed incomes. For example- fathers loss can be set
off against clubbed sons income CIT vs.J H Gotla (1985) 156 ITR 323 (SC)
Provisions for set off are mandatory and not optional for the assessee


10.1.2 Set off of losses from one head against any other head of income Sec 71
Where an assessees income under any head is a loss, such loss can be set off against any other
head of income.
Exceptions:
The following losses cannot be set off against any other head of income:
Capital Loss (long term and short term)
Loss from speculation business
Loss from owing and maintaining horses
Loss from lottery card games etc
Loss from an exempted source
Loss from a specified business referred to in section 35AD
Loss from business or profession cannot be set off against the head salaries w.e.f
assessment year 05-06


10.2 Carry forward and Set off of losses:
Where an assessee is not able to completely set off his losses against income under the same
head or other heads of income during the same year such unabsorbed losses can be carried
Set off and Carry Forward 399

forward and set off from income of subsequent years.
However only the following losses can be carried forward and set off in the subsequent years:
Loss from House property Sec 71B
Business loss Sec 72
Speculation Loss Sec 73
Capital Loss Sec 74
Loss from owning and maintaining horses Sec 74A
Loss from specified businesses referred to in Sec 35AD- Sec 73A
Losses apart from the above cannot be carried forward.For example Loss on interest on
securities where it is assessed under I ncome from other sources.
Assessee should file the return of loss within the due date of filing returns. However this
condition is not mandatory for loss from house property and unabsorbed depreciation, capital
expenditure on family planning and capital expenditure on scientific research Sec 80
Such loss as per return should be notified by the Assessing officer in writing u/s 157.
Delayed filing of returns does not affect the right of the assessee to set off and carry
forward losses of the past year (other than the relevant previous year). For example, if the
assessee had a loss of Rs 2 lacs pertaining to the previous year 06-07 and has filed a belated
return for the year 07-08, he would still be eligible to carry forward and set off the loss of the
previous year 06-07.
400 DIRECT TAX




Carry Forward and Set off of Losses Summary of the Provisions

Head of Income Carried forward and set off Remarks/ Conditions
House property
Loss Sec 71B
8 subsequent assessment
years
Provisions of Sec 80 are not
applicable
Can be set off only against Income
from House Property
Business Loss
Sec 72
8 subsequent assessment
years

However the following
losses can be carried forward
indefinitely:
1. Unabsorbed Depreciation
2. Unabsorbed capital ex-
penditure on Scientific
research
3. Unabsorbed family
planning expenditure
Can be set off only against business
income
Business need not be in existence in the
year of set off
Losses can be set off only by the
assessee who has incurred the loss
except the following circumstances:
1. Succession of a business through
inheritance
2. Amalgamation u/s 72A
3. Succession u/s 47(xiii) / 47 (xiv)
4. Demerger
Speculation Loss
Sec 73
4 subsequent assessment
years
Can be set off only against speculative
income
It is not necessary that assessee must
continue the speculative business in the
year of set off
Loss from
Specified
business u/s
35AD- Sec 73A
No restrictive time limit
losses can be carried forward
for infinite number of years
Can be set off only against income
from any specified business
Provisions of Sec 80 shall not apply
Capital Loss
Sec 74
8 subsequent assessment
years
Short term capital loss can be set off
against any Capital Gains (long term /
short term )
Long term capital loss can be set off
only against long term capital gains
Loss from
owning and
maintaining
horses Sec 74A
4 subsequent assessment
years
Business must be in existence in the
year of set off
Can be set off only against income
from this activity
Set off and Carry Forward 401










Order of set off of losses CIT vs. Hari Prasad [1975] 99 ITR 118 (SC)
1. Current year expenditure on Scientific research and family planning
2. Current year depreciation
3. Brought forward loss - business loss
4. Unabsorbed capital expenditure on Scientific research
5. Unabsorbed Depreciation
6. Unabsorbed family planning expenditure

Business Loss Sec 72:
- Loss of one business can be set off against profits of another business in subsequent year
- Where shares are held as stock in trade, deemed dividend u/s 2(22)(e) on such shares can be
set off against business losses Western States Trading Co Pvt Ltd vs. CIT [1971] 80
ITR 21 (Supreme Court)
- Business of spouse or minor child clubbed with the income of the assessee can be set off
against brought forward business losses of the assessee CIT vs. J.H.Gotla [1985]
1 5 6 ITR 323(SC)
- Business continuation is not necessary for the purpose of set off of losses

Losses to be set off by the person who has incurred such losses - Sec 78(2)
- Losses can be carried forward by the assessee who has incurred the loss. However in the
following circumstances, losses can be set off by a person other than the person who has
incurred the loss:
o Inheritance of business - However, unabsorbed depreciation cannot be carried forward
o Amalgamation and Demerger of companies Sec 72A
o Amalgamation of Banking company u/s 72AA
o Succession of a sole proprietary concern or partnership firm by a company u/s 47(xiii)/(xiv)


No loss can be carried forward beyond eight years notwithstanding the fact that there was
no assessment for one of the years CIT Covelong Beach Hotel (India) Ltd [2003] 129
Taxman 473 (MAD).
Where shares are held as stock in trade, dividend income shall be treated as business income and losses
can be set off against the same CIT vs. Ramnath Goenka - [2003] 259 ITR 26 (MAD).
Where losses are not set off against the profits of the immediately succeeding year or years, they cannot
be set off against profits at a later date- B.C.S. Kartar Chit Fund and Finance Co (P) Ltd vs. CIT
[1989] 46 Taxman 88 (Punjab and Haryana)
According to Sec 41(5), loss of a discontinued business per taining to the year of discontinuance can be
carried forward and set off against profits of such business u/s 41(1) /(3)/(4)/(4A). This is the only case
where accumulated losses can be set off beyond 8 years.
Loss of a business acquired by inheritance Sec 78 - CIT vs. Bai Maniben [1960] 38 ITR 80 (BOM).
402 DIRECT TAX







The term inheritance means only a transmission of assets and liabilities of one person to
another by personal law Hindustan Aeronautics Limited vs CIT[ 1984] 149 ITR
795 [KAR] .
Unabsorbed depreciation cannot be carried forward in the case of inheritance since
Sec 32(2) does not cover inheritance.
Where legal heirs of a deceased proprietor carry on his business as a par tnership firm under the same
name and trade- it was held that the losses of the proprietary concern can be carried forward and set
off against the profits of the partnership concern CI T vs. Madhukant M Mehta [2001] 247 I TR 805
(SC )


When Business loss or unabsorbed depreciation cannot be carried forward:
- Loss or unabsorbed depreciation of a HUF cannot be carried forward by a member of the
HUF on partition of HUF
- U absorbed depreciation cannot be carried forward on account of inheritance since inheritance
is not covered u/s 32
- Loss or unabsorbed depreciation of a firm succeeded by another firm cannot be carried forward
since the assessee has changed
- Loss or unabsorbed depreciation of a sole proprietary concern taken over by a firm cannot be
carried forward even if the proprietor is a partner of the firm
- Loss or unabsorbed depreciation of a partnership firm taken over by one of its partners cannot
be carried forward in the hands of such partner.

10.3 Carry forward and Set off in the case of Amalgamation- Sec 72A(1)/(2)/(3)
Accumulated loss and unabsorbed depreciation of an amalgamating company can be carried
forward and set off by the amalgamated company if the following conditions are satisfied:
Amalgamation is of an
o Industrial Undertaking
o Ship
o Hotel
o Public sector company/companies engaged in operation of aircrafts with one or more
public sector companies engaged in similar businesses
o Banking company with a specified bank
Note: Industrial undertaking refers to an undertaking which is engaged in:
o Manufacture or processing of goods
o Manufacture of computer software
o Generation or distribution of electricity or any other form of power
o Providing telecommunication services
o Mining
o Construction of ships, aircrafts or rail systems
Conditions to be satisfied by the amalgamating company:
o Should be engaged in the business, in which the accumulated loss/depreciation occurred,
for 3 or more years
Set off and Carry Forward 403








o Has continuously held at least 75% of the book value of fixed assets on the date of
amalgamation, for a period of 2 years prior to amalgamation
Conditions to be satisfied by the amalgamated company:
o Holds for a minimum period of 5 years, at least 75% of the book value of fixed assets of
the amalgamating company acquired on amalgamation
o Continues the business of the amalgamating company for a period of 5 years from the
date of amalgamation
o Such other conditions as may be prescribed under Rule 9C.
Conditions as per Rule 9C:
o The amalgamated company achieves at least 50% of the installed capacity of the
amalgamating company within 4 years from the date of amalgamation
o The amalgamated company maintains the minimum capacity of 50% of installed capacity
till the end of the 5
th
year from the date of amalgamation
o Amalgamated company shall furnish a report of a chartered accountant in Form 62 for the
above purpose.
In the event of any violation of the above conditions:
- The losses already set off shall be considered as income of the amalgamated company in the
year of violation.
- Further the remaining unadjusted business loss and unabsorbed depreciation cannot be carried
forward.



In case of amalgamation of sick industrial company with another company BIFR has
power to grant benefit flowing from section 72A without referring matter to revenue
DGIT vs. Orient Vegetax Pro Ltd. [2012] 25 taxmann.com 339 (Delhi)







If all the above conditions are satisfied, the accumulated losses of the amalgamating company
can be carried forward and set off for a fresh period of 8 years from the year of amalgamation.
Unabsorbed depreciation can be carried forward indefinitely.



10.4 Business Reorganization Sec 47(xiii)/(xiv) Sec 72A(6)
Where there is a succession/ reorganization as per sec 47(xiii)/(xiv)[conversion of a partnership
firm/sole proprietary concern into a company], the accumulated losses and unabsorbed depreciation
of the sole proprietary concern/ partnership firm can be carried forward by the successor company.


The accumulated losses of the predecessor entity can be carried forward and set off for a fresh
period of 8 years from the year of conversion. Unabsorbed depreciation can be carried forward
indefinitely.

In the event of any violation of the conditions u/s 47(xiii)/(xiv):
- The losses already set off shall be considered as income of the successor company in the year
of violation.
- Further the remaining unadjusted business loss and unabsorbed depreciation cannot be carried
forward.
404 DIRECT TAX












In the case of conversion of a private limited company or an unlisted public limited company into
a LLP as referred u/s 47(xiib),the accumulated loss / unabsorbed depreciation of the
predecessor company, shall be deemed to be the loss of the successor LLP of the previous
year in which business reorganisation was effected and the provisions of set off and carry
forward of loss and allowance for depreciation shall apply accordingly.
Where any of the provisions contained in Sec 47(xiib) are subsequently violated, the set off of loss
or allowance of depreciation made in any previous year in the hands of the successor limited liability
partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in the
year of violation.


10.5 Carry forward and Set off in the case of Demerger Sec 72A(4)(5)
Where the loss / unabsorbed depreciation is directly relatable to the undertaking transferred
to the resulting company, the entire amount of such loss and depreciation shall be allowed in
the hands of resulting company
Where such loss or depreciation is not directly attributable, then such losses shall be
distributed in the proportion of assets transferred and held by the demerged company


The unabsorbed business loss can be carried forward by the Resulting Company as if such
demerger has not taken place i.e. it can be carried forward only for the remaining unexpired period.


10.6 Carry forward and Set off on amalgamation of a Banking company with
a Banking Institution - Sec 72AA
Where there is an amalgamation of a banking company with a banking institution under
a scheme of Central Government as per the Banking Regulation Act 1949, accumulated
loss and depreciation of the banking company shall be deemed to be the loss / unabsorbed
depreciation of the banking institution of the previous year in which such amalgamation
has taken place.

In other words, accumulated losses can be carried forward for a fresh period of 8 years.
Unabsorbed depreciation can be carried forward indefinitely.


10.7 Business reorganization of co-operative banks Sec 72 AB
The term business reorganization includes both amalgamation and demerger.
In the case of Amalgamation: Unabsorbed losses can be carried forward by the amalgamated
company for the unexpired period.
Set off and Carry Forward 405






In the case of Demerger: Split losses on the basis of relevance or assets transferred between
the demerged and resulting company. Losses can be carried forward only for the unexpired
period.
Conditions for predecessor bank:
Should have been engaged in banking for 3 years or more and
Should have held at least 75% of the fixed assets for a minimum period of 2 years
prior to the date of business reorganization
Conditions for successor bank
Hold at least 75% of the fixed assets for a period of 5 years from the date of succession
Continue the business of banking for a period of 5 years from the date of re organization
Fulfill such other conditions as may be prescribed by the Central Government.


Accumulated loss means so much of the loss of the predecessor firm or the proprietary
concern or the private company or unlisted public company before conversion into limited liability
partnership or the amalgamating company or the demerged company, as the case may be, under
the head Profits and gains of business or profession (not being a loss sustained in a speculation business)
which such predecessor firm or the proprietary concern or the company or amalgamating company or demerged
company, would have been entitled to carry forward and set off u/s 72 if the reorganisation of business or
conversion or amalgamation or demerger had not taken place
Unabsorbed depreciation means so much of the allowance for depreciation of the predecessor firm or the
proprietary concern or the private company or unlisted public company before conversion into limited liability
partnership or the amalgamating company or the demerged company, as the case may be, which remains to be
allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company
or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the
reorganisation of business or conversion or amalgamation or demerger had not taken place.



10.8 Speculative losses Sec 73
According to explanation to Sec 73: Where the assessee is a company and
The gross total income of the company Does Not mainly consist of:
o Income from house property
o Capital gains
o Income from other sources and
The principal business of the company is Not banking, or granting of loans and advances
and
The business of the company consists wholly or partly of purchase and sale of shares of
other companies-
Such company shall be deemed to be carrying on speculative business to the extent of
purchase and sale of shares.
The above provision is applicable even if there is no avoidance of tax by the assessee.
406 DIRECT TAX









Where the assessee was dealing in Government securities without actual delivery, it fell
within the ambit of Sec 43(5) speculative business and hence loss from the activity
cannot be set off against normal income from banking by virtue of Sec 73 ANZ
Grindlays bank vs. DCIT [2004] 88 ITD 53 (Delhi)
For the purpose of explanation to Sec 73, the relevant criteria is the composition of gross total income and
not the percentage of funds of the assessee held as investments Melville Finvest Ltd vs. JCIT [2004]
89 ITD 528 (Hyderabad)
For the purpose of Sec 73, it is not mandatory that the purchase and sale of shares should take place
within the same year. What is required is that the business of the assessee should consist of purchase and
sale of shares DCIT vs. Aakrosh Investment Leasing (P) Ltd [2004] 90 ITD 287 (Mumbai)
Loss suffered by an assessee share broker on account of purchase of shares on his own account
(considered speculative u/s 73) cannot be set off against receipts of brokerage earned from trading on
behalf of clients or any other income under the head Capital gains or Income from other sources
SRJ Securities Ltd vs. ACIT [2003] 86 ITD 583 (Delhi)
Continuity of business is not required
Loss incurred in speculative business in banned items cannot be carried forward to the next year CIT
vs. Kurji Jinabhai Kotecha [1977] 107 ITR 101(SC)
Assessee had incurred a loss in trading in shares. Tribunal held that loss incurred on sale of shares would
not fall within Explanation to Sec 73 and the same could not be disallowed. Hence, Sec 73 is not
applicable and the deduction claimed by the Assessee is valid -CIT vs. Asiatic Industrail Gases Ltd.
[2012] 19 Taxmann.com 294 (KAR.)
Explanation to section 73 does not operate in respect of a company whose gross total income
consists mainly of income which is chargeable under heads of 'interest on securities', 'income from
house property', 'capital gains' and 'income from other sources' CIT vs. HSBC Securities &
Capital Markets India (P.) Ltd [2012] 23 taxmann.com 377 (Bom.)




Mr. P, a resident individual, furnishes the following par ticulars of his income and other details for the
previous year 2012-13:
Rs.
i Income from salary 18,000
ii Net annual value taxable under income from house proper ty 70,000
iii Income from business 80,000
iv Income from speculative business 12,000
v Long term capital gain on sale of land 15,800
vi Loss on maintenance of race horse 9,000
vii Loss on gambling 8,000
Depreciation allowable under the Income-tax Act comes to Rs.8000 for which no details are given
above.
The other details of unabsorbed depreciation and brought forward losses are:

Rs.
i Unabsorbed depreciation 9,000
ii Loss from speculative business 16,000
iii Shor t term capital loss 7,800
iv Unrealised rent 17,000

Compute the gross total income of Mr. P, for the Assessment year 2013-14 and amount of loss that can
Set off and Carry Forward 407

or cannot be carried forward.


Solution:
Gross total income of Mr. P- The following assumptions have been made to calculate gross total
income- Brought forward loss from speculative business pertains to the assessment year 2009-10
(or any subsequent year up to the assessment year 2012-13).

Brought forward short-term capital loss pertains to the assessment year 2005-06 (or subsequent year up
to the assessment year 2012-13).
Unrealised rent is rent which could not be realised by Mr. P up to March 31, 2012. It is not loss under the
head Income from house property under section 71B.
Depreciation of the current year of Rs.8000 is depreciation deductible under section 32 in respect of non-
speculative business.
Net annual value of Rs.70000 given in the problem is calculated before deducting standard deduction u/s
24(a).
Computation of gross total income-
Salaries
Income from house property
Net annual value
Rs.



70,000
Rs.
18,000
Less: Deduction under section 24 (30% of Rs.70000) 21,000
House property income
Profits and gains of business or profession
Non-speculative business



80,000
49,000
Less: Current year depreciation 8,000
Balance 72,000
Less: Brought forward unabsorbed depreciation 9,000
Balance (a) 63,000
Speculative business 12,000
Less: Brought forward speculative loss 16,000
Balance (loss of Rs.4000 will be carried forward) (b) Nil
Income from business {(a) + (b)}
Capital gains-
Long-term capital gains



15,800
63,000
Less: Brought forward short-term capital loss 7,800 8,000
Gross total income 1,38,000

Ms Geetha is a resident individual, provides the following details of her income/losses for the year ended
31.3.2013:
Salary received as a partner from a partnership firm Rs.750000.
Losses on sale of shares listed in BSE Rs.30000. Shares were held for 15 months and STT paid on sale.
Long-term capital gain on sale of land Rs.500000.
Rs.51000 received in cash from friends in par ty.
Rs.55000 received towards dividend on listed equity shares of domestic companies.
Brought forward business loss of assessment year 2011-12 Rs.1250000. The return for assessment year
2012-13 was filed in time.
408 DIRECT TAX

Profits and gains from business or profession 7,50,000

Less: Brought forward business loss of assessment year 2011-12 7,50,000 Nil

Compute gross total income of Ms. Geetha for the assessment year 2013-14 and ascer tain the amount
of loss that can be carried forward.

Solutions:
Computation of gross total income of Ms. Geetha-
Rs.
Set off and Carry Forward 409




Income from capital gains



5,00,000
Income from other sources
Gift 51,000
Dividend from a Indian company (*exempt under section 10(34)) Nil 51,000
Gross total income 5,51,000
Note: Brought forward business loss of assessment year 2011-12 of Rs.500000 (the unadjusted amount)
will be carried forward.
Long-term capital loss on transfer of shares cannot be set off. Under section 10(38) long-term capital
gain on transfer of shares is exempt from tax if securities transaction tax is applicable. Conversely, any
long-term capital loss in such case is not taken into consideration. i.e. loss from transaction where
income would otherwise have been exempted from tax, is not eligible for set off against other
income


Mr. Soohan submits the following details of his income for the assessment year 2013-14.


Income from salary 3,00,000
Loss from let out house proper ty 40,000
Income from sugar business 50,000
Loss from iron ore business b/f 12,00,000
(discontinued in 2004-05)
Shor t term capital loss 60,000
Long term capital gain 40,000
Dividend 5,000
Income received from lottery winning (Gross) 50,000
Winning in card games 6,000
Agricultural income 20,000
Long term capital gain from shares (STT paid) 10,000
Shor t term capital loss under section 111 10,000
Bank interest 5,000
Calculate gross total income and losses to be carried forward.
Solution:
Computation of income of X for the assessment year 2013-14

Salary


Rs.
Business
income
Rs.
Long-term
capital gain
Rs.
Income from
other sources
Rs.
Salary
Business income
Long-term capital
Winnings from lottery
3,00,000
-
-
-
-
50,000
-
-
-
-
40,000
-
-
-
-
50,000
410 DIRECT TAX




Winnings from card games
Bank interest
Total
Less: Current year losses
Loss from house property
Short-term capital loss
Balance
Less: Brought forward business loss
Net income (Total: Rs.3,21,000)
-
-
-
-
-
-
6,000
5,000
3,00,000


40,000
-
50,000


-
-
40,000


-
40,000
61,000


-
-
2,60,000
-
50,000
50,000
Nil
-
61,000
-
2,60,000 Nil Nil 61,000


Mr. Rajat submits the following information for the financial year ending 31
st
March, 2012. He desires that
you should:
a. Compute the total income and
b. Ascer tain the amount of losses that can be carried forward.
He has two houses: Rs.
House No. I-Income after all statutory deductions 72,000
House No. II-Current year loss (30,000)
He has three proprietary businesses:
Textile Business:
Discontinued from 31
st
October, 2011-Current year loss 40,000
Brought forward business loss of the assessment year 2008-2009 95,000
Chemical Business:
Discontinued from 1
st
March, 2010-hence no Profit/Loss NIL
Bad debts allowed in earlier years recovered during this year 35,000
Brought forward business loss of the assessment year 2010-2011 50,000
Leather Business: Profit for the current year 1,00,000
Share of Profit in a firm in which he is Par tner since 2002 16,550
a) Shor t-term Capital Gain 60,000
b) Long-term Capital Loss 35,000
Contribution to LIC towards Premium 10,000
Solutions:
Computation of total income

Rs.
House proper ty income [see Note 1] 42,000
Business income [see Note 2] Nil
Set off and Carry Forward 411








Shor t-term capital gain


60,000
Gross total income 1,02,000
Less: Deduction under section 80C 10,000
Total income 92,000
Long-term capital loss of Rs.35000 will be carried forward as per the provisions of section 70.
Notes:
The loss from house proper ty II will be set off against income from house proper ty.
As all the three business carried on by Mr. Rajat are non-speculative, mutual set off of losses from are
business against profit from another business is possible [Current years business income: - Rs.40,000 +
Rs..35,000 + Rs.1,00,000 Rs.95,000, (brought forward loss: Rs.95,000 + Rs.50,000) ; Rs.1,45,000,
loss of Rs.50,000 will be carried forward.
Long-term capital loss can only be set off against long-term capital gain.


10.9 Change in the constitution of Firms Sec 78
Change in Constitution: Where there is a change in constitution of a firm, the firm shall not be
entitled to carry forward, the deceased or retired partners share of loss / depreciation.
The share of loss of the deceased partner in business loss, house property loss, capital loss or loss
from the activity of owing or maintaining horses shall be disallowed.
Succession:
Where there is a succession of business other than by inheritance, the successor cannot set off
predecessors losses.
However if the succession is as per Sec 47(xiii)/(xiv), then set off and carried forward shall apply
subject to the conditions specified
If any of the conditions are not complied with then losses already set off shall be deemed to be the
income of the year of violation


In view of provisions of section 78(2), loss suffered by an erstwhile par tnership firm in
which assessee was a par tner, could not be set off against his individual income - Pramod
Mittal vs. CIT [2012] 205 TAXMAN 444 (Delhi).



State the factors to be borne in mind relating to carry forward and set off of losses in case of
change in constitution of firm or succession under section 710.
M/s. Vivitha & Co., a par tnership firm, with four par tners A, B, C and D having equal shares,
furnishes the following details, summarized from the valid returns of income filed by it:

Assessment Year Item eligible for carry forward and set off
2011-12 Unabsorbed business loss Rs.1,20,000
2012-13 Unabsorbed business loss Rs.1,90,000
412 DIRECT TAX




2012-13 Unabsorbed depreciation Rs.1,20,000
2012-13 Unabsorbed long-term Capital gains:
-from shares Rs.1,10,000
-from shares Rs.1,90,000
C who was a par tner during the last three years, retired from the firm with effect from 1.4.2011.
The summarized results of the firm for the assessment year 2013-14 are as under.
Rs.
Income from house property 70,000
Income from business:
Speculation 2,20,000
Non-speculation (-)50,000
Capital gains:
Shor t-term (from sale of shares) 40,000
Long-term (from sale of building) 2,10,000
Income from other sources 60,000
Briefly discuss how the items brought forward from earlier years can be set off in the hands of the firm for
the assessment year 2013-14, in the manner most beneficial to the assessee. Also show the items to be
carried forward. Computation of total income is not required.
Solution:

Particulars

Brought
forward
losses
Share of retiring partner
C in losses (i.e., amount
of brought forward loss
which cannot be adjusted
as per section 78)
Balance
losses
which can
be
adjusted


Unabsorbed business loss (assessment year 2011-12)
Unabsorbed business loss (assessment year 2012-13)
Unabsorbed depreciation (assessment year 2012-13)


Unabsorbed long-term capital gains (assessment year
2012-13):
From shares
From building
Rs.
1,20,000
1,90,000
1,20,000





1,10,000
1,90,000
Rs.
30,000
47,500
Nil (unabsorbed depreciation
by provisions of section
78)



27,500
47,500
Rs.
90,000
1,42,500
1,20,000





82,500
1,42,500
Set off and Carry Forward 413







Particulars

Income of
assessment
year
2012-13

Income avail-
able for set
off of brought
forward
Losses

Adjustment of brought
forward losses
Income
chargeable
to tax for
assessment
year 2012-
13
Rs. Rs. Rs. Rs.

Income from house proper ty


Income from business:
Speculation
Non-speculation





Capital gains
Shor t-term (from sale of
shares)
Long term (from sale of
building)





Income from other sources

70,000



2,20,000
(-)50,000







40,000


2,10,000







60,000

70,000



1,70,000








Nil


2,10,000







60,000
70,000
(unabsorbed
depreciation)



1,70,000 (Rs.90,000 business
loss of assessment year
2011-12 is fully adjusted and
Rs.80,000 business loss of
assessment year 2012-13 is
adjusted)

-


210000 (Rs.1,42,500
unabsorbed LTCG from
building is fully adjusted and
Rs.67,500 of unabsorbed
LTCG
of shares is adjusted)
50,000
(unabsorbed
depreciation)

Nil



Nil








40,000









10,000
The following losses are to be carried forward:
Unabsorbed business loss of assessment year 2011-12: Rs.62,500
Unabsorbed LTCG on shares of assessment year 2011-12: Rs.15,000



10.10 Carry forward and set off in the case of companies in which public are
not substantially interested Sec 79
Where a change in share holding has occurred in a company in which public are not
substantially interested, then losses can be carry forward and set off only if:
Not less than 51% of the share holding,
on the last day of previous year in which the loss was incurred and
on the last day of the previous year in which it is to be set off,
are held by the same persons.
414 DIRECT TAX




The above provisions shall not apply if there is a change in constitution consequent upon:
Death of a share holder
Transfer by way of gift to any relative
Change in share holding of an Indian company which is a subsidiary of a foreign
company due amalgamation or demerger of a foreign company provided:
51% of the shareholders of the amalgamating or demerged foreign company continue
to remain the share holders of the amalgamated or resulting foreign company.