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Introduction
It is an inherent feature of a tax system that collects tax on profits but does not provide full
relief for losses (i.e. does not pay out an equivalent ‘negative tax’ on negative profits) that
provision needs to be made to allow unrelieved losses to be carried over and offset against
past and future profits if manifest inequity is to be avoided1. A rational system of taxation
has to take due cognizance of losses suffered by a taxpayer. That’s why there are specific
items of losses for set off in subsequent years. The operating carry forward of loss is an
Income Tax provision for the off-setting of a prior year loss against current profits. The
importance of the loss carry forward provision to an assessee is that it preserves valuable
cash which otherwise would have to be paid out in taxes. Such funds are retained in the
business and can be used for working capital and/or expansion of fixed or other non-current
assets.
The process of carry forward of loss is applied only when a loss cannot be set off. For the
set off to take place, there has to be inter-source adjustment under the same head of income.
If that’s not possible, then it has to go through the inter-head adjustment in the same
assessment year. And in case the loss fails to filter through this process, then loss is allowed
to carry forward for the subsequent assessment years as per the provisions of the Income
Tax Act.
When a tax reduction is realized as a result of a loss carry forward, two factors are
responsible: a prior year loss and a profit in a subsequent year. Neither is good in itself;
ยช 4th Year B.A., LL.B. (Hons.), National Law School of India University, Bangalore.
1 Maureen Donnelly & Allister Young, “Aspects of Construing A Rational Framework For Loss Relief: A
Sample of Show”, British Tax Review (2005).
but, together, a tax reduction is the result which is beneficial to the assessee2. There must be
a profitable year - the determining factor - or the carry forward will never be realized. The
amount of profit determines what portion of the carry forward will be applied to reduce
taxes. The actual tax benefit, when cash is conserved, is in the year of realization, not in the
year of the loss.
Before any loss is allowed to be carried forward, two conditions have to be satisfied:
1. Firstly, the return of loss must be submitted on or before the due date and
2. Secondly such loss has been determined by the Assessing Officer. The Assessing
Officer has to notify the assessee by an order in writing the amount of the loss as
computed by him which the assessee is entitled to carry forward3.
The losses which are eligible to be carried forward must be set off against the income/ profit
of the immediately succeeding year and if there is any balance still to be set off, it should be
set off in the immediately next succeeding year or years within the time allowed. Where the
losses incurred are not set off against the income/ profits of the immediately succeeding
year/ years, as the case may be, they cannot be set off at a later date4. Where the loss return
is filed but the acceptance of the loss is not notified, such loss does not get lost for income
tax purposes5.
The unabsorbed losses must enter the assessment of every ‘following year’ for ascertaining
whether they could be set off against the profits and gains of any business, profession or
vocation. It is only when it is found in each year that they could not be so absorbed then
they are allowed to be carried forward to the next following year and so on6.
If the loss arising in the previous year was under a head not chargeable to tax, it could not be
allowed to be carried forward and absorbed against income in a subsequent year from a
taxable source. In such cases, the assessee is not required to show the same in the return.
2 James C. van Horne, “A Look at the Loss Carry- Forward”, The Accounting Review (Jan. 1963) c.f.
Jeramdas v. CIT (1965) 58 ITR 1 (Bom.).
3
Nor is the ITO under any obligation to compute or assess it, much less for the purpose of
‘carry forward’7.
Indian taxation law does not provide for all loses to be carried forward. Only the following
losses enjoy this right to carry forward their right under our taxation law:
1. Loss under the head “Income from house property”- Section 71B.
2. Loss under the head “Profits and gains of business or profession”, i.e., loss from
speculative or non-speculative business- Sections 72 and 73.
3. Loss under the head “Capital gains, i.e., short term or long term capital loss- Section
74.
4. Loss from the activity of owning and maintaining race horses- Section 74A.
Carry forward of Business Loss8
Loss from a business can be adjusted against income from any other head of income in the
same assessment year. However, when the loss is to be carried forward to the subsequent
year, it can be adjusted only against business income. Loss can be carried forward and set off
only against the business income but not necessarily the same business in which the loss has
been incurred. Business profits would also include profits derived from a business activity
but assessable under a head other than “Profits and gains of business or profession”. (In
some cases income from a business activity is taxable under other heads of income)9.
Business income may be from the same business in which the loss was incurred, or may be
any other business. It is impossible to formulate any infallible general rule or test applicable
to all cases for determining whether two businesses are separate or whether they constitute
one and the same business: the determination of that question depends upon the facts and
circumstances of each case10. One test which has been frequently invoked in order to
determine whether two or more businesses are separate businesses or constitute the same
7 CIT v. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118 (SC).
8 Section 72 of the I.T. Act deals with the carry forward of business loss.
9 Dr. Vinod K.Singhania & Monica Singhania, Taxmann Student’s Guide to Income Tax (35th edn., New
Delhi: Taxmann Publications (P.) Ltd., 2006) at 571.
10 Re Hiralal, 11 ITR 128.
4
business, is that laid down by Rowlatt J. in Scales v. George Thompson & Co. Ltd.11, viz, is there
an interconnection, an interlacing, interdependence between and a unity embracing, the
businesses12. The interdependence may be financial; the unity may be unity of management
and control13. But this principle will not apply where income is derived by the exploitation of
a commercial asset. In the case of latter type of income, there is only a difference in the
manner of exploitation, that is to say, instead of the user of the asset by the assessee himself,
there is a leasing out of the asset. The income derived from such leasing is to be considered
to be of the same nature, i.e., business income. Unabsorbed depreciation and losses incurred
when the asset was exploited by the assessee himself can be carried forward and set off
against the income derived from leasing out the commercial asset14.
It is the profits of the assessee who incurred the loss against whom the loss can be carried
forward and set off subject to following exceptions:
· Accumulated business loss of a demerged company.
· Accumulated business loss of a proprietary concern or a firm when its business is
taken over by a company by satisfying conditions of section 47(xiii)/(xiv).
· Loss of business acquired by inheritance.
Carry forward of depreciation which is not absorbed during the current year, unabsorbed
capital expenditure on scientific research and family planning expenditure is governed by
section 32(2) and not by section 72.
In some cases income from a business activity may be taxed under other heads also. For
example, dividend income is though assessable under the head “other sources”, it may well
be treated as business income for purposes of set off of past business losses against such
income, if the relevant shares were held as stock in trade and not as investment15. However,
with effect from the assessment year 2004-05, the dividend income is exempt and hence,
there is no question of set off.
11 13 TC 83.
12 Dinesh Vyas, Kanga, Palkhivala & Vyas The Law & Practice of Income Tax Vol.1(9th edn., New Delhi:
Lexis Nexis Butterworths, 2004) at 1292.
13 CIT v. Prithvi, 63 ITR 632 (SC).
14 CIT v. Prem Chand Jute Mills Ltd., (1978) 114 ITR 769 (Cal).
15 CIT v. Ramnath Goenks, (2003) 259 ITR 26 (Mad).
5
Business income is broken up under different heads only for the purpose of computation of
total income. By this break up, business income does not cease to be the income of the
business. The different heads of income are only the classification prescribed by the Incometax
Act for computation of income16.
The carried forward loss can be set off against interest earned by placing the excess business
funds in short-term deposits with a bank though interest may be chargeable under the head
other sources17.
Usually, the losses can be set off only by the assessee who has incurred loss. But there is an
exception to it; where a business carried on by one person, is acquired by another person
through inheritance. A loss can be carried forward by the legal heir for the balance number
of years for which the assessee could have carried forward the loss. But the unabsorbed
depreciation cannot be carried forward by the legal heir as inheritance is not covered under
section 32(2)18.
As per section 72(2), the business loss should be set off before setting off unabsorbed
depreciation, etc. Such carried forward business loss will be set off against business head
only after the current year’s depreciation, current capital expenditure on scientific research
and expenditure on family planning have been claimed. Therefore, the order of set off will
be as under:
1. Current year depreciation- section 32(1);
2. Current year capital expenditure on scientific research and current year expenditure
on family planning to the extent allowed;
3. Brought forward business or profession losses- Section 72(1);
4. Unabsorbed depreciation-section 32(2);
5. Unabsorbed capital expenditure on scientific research- section 35(4);
6. Unabsorbed expenditure on family planning- section 36(1)(ix).
16 CIT v. Chugandas & Co., (1965) 55 ITR 17 (SC).
17 Snam Progetti S.P.A. v. Additional CIT, (1981) 132 ITR 70 (Del).
18 Dr. Girish Ahuja & Dr. Ravi Gupta, Bharat’s Concise Commentary on Income Tax (New Delhi: Bharat
Law House Pvt. Ltd., 2006) at 796.
6
According to the proviso to section 72(1), if there is any loss of a business which is
discontinued in the circumstances specified in section 33B19 and it is re-established,
reconstructed or revived by the assessee at any time before the expiry of a period of three
years from the end of the previous year in which it was discontinued, then the loss of the
previous year in which such business is discontinued including the brought forward loss:
1. Shall be allowed to be set off against the profit and gains, if any, of tha t business or
any other business carried on by him and assessable for that assessment year; and
2. If the loss cannot be wholly so set off, the amount of balance loss be carried to the
following assessment year and so on for seven assessment years immediately
succeeding provided such reestablished business is continued to be carried by the
assessee.
Continuity of the business is not necessary for the loss to be carried forward by the assessee
during the year in which brought forward loss is sought to be set off but it cannot be carried
forward for more than eight assessment years. However, there could be situation where a
business loss can be carried forward for more than eight assessment years. As per section
41(5), where the business or profession referred to in this section is no longer in existence
and there is income chargeable to tax under sub-section (1), sub section (3), sub section (4)
or sub section (4A) in respect of that business or profession, any loss, not being a loss
sustained in speculation business, which arose in that business or profession during the
previous year in which it ceased to exist and which could not be set off against any other
income of that previous year shall, so far as may be, be set off against the income chargeable
to tax under the sub sections aforesaid20.
Since the scope for deducting a business loss is wider, and operates against the totality of the
income, section 72(3) limits its operation for only eight assessment years. It is in this context
that section 72(2) gives priority to the business loss over the carried forward depreciation
19 Section 33B refers to cases where the business of any industrial undertaking carried on in India is
discontinued in any previous year by reason of extensive damage to, or destruction of, any building,
machinery, plant or furniture owned by the assessee and used for the purposes of such business as a direct
result of flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or riot or civil
disturbance; or accidental fire or explosion; or action by an enemy or action taken in combating an enemy.
20 Dr. Girish Ahuja & Dr. Ravi Gupta, Bharat’s Concise Commentary on Income Tax (New Delhi: Bharat
Law House Pvt. Ltd., 2006) at 798.
7
allowance. Whenever there is a business loss as well as depreciation allowance to be carried
forward, effect shall first be given to the business loss as provided under section 72(1).
Carry forward and set off of loss and depreciation- When permissible in
the hands of amalgamated and demerged company21
If we see the Budget Speech of the Finance Minister, the Notes on Clauses of the Finance
(No. 2) Bill of 1977 and the Memorandum explaining the provisions of the said Bill, it will
appear clear that sickness among industrial undertakings was regarded as a matter of grave
national concern in as much as closure of any sizeable manufacturing unit in any industry
entails social costs in terms of firstly, loss of production, secondly, unemployment and thirdly,
waste of valuable capital22. At that time, taking over of sick units by the Government was a
more viable solution than closure. Further useful was amalgamation of such units with other
active units and hence it was felt that a more wiser strategy would be to facilitate
amalgamation of sick industrial units with sound ones by providing incentives and removing
impediments in the way of such amalgamation.
This was done by providing a deeming fiction, where under an amalgamated company,
although a successor in interest, was allowed to carry forward and set off accumulated loss
and unabsorbed depreciation of the amalgamating company subject to certain conditions.
During the last decade or so, with the advent of foreign companies into the Indian market,
competitiveness has grown and as a result there arose a need for the rationalisation of laws
regarding the business reorganisation for the restructuring of the production system and
better utilisation of resources. One such need was to make demergers (a relatively new
phenomenon to the Indian Economy during the nineties) tax neutral. This was required
especially where there was a unit or an undertaking which was beyond the managerial skills
21 Section 72A of the I.T. Act.
22 K.Chaturvedi & S.M. Pithisaria, Income Tax Law Vol.2 (5th edn., Nagpur: Wadhwa & Co., 1998) at
3266.
8
of a company and could be put to better use by another company. Thus as a result, it was
important that the advantage of carry forward of unabsorbed losses be also given to
demergers and amalgamations with the least amount of procedural formalities.
Thus, it was felt that the procedure which was provided was too cumbersome for traditional
amalgamations and inadequate for demergers of undertakings. Hence, the section was
changed by the Finance Act, 1999 and S. 2(19AA) and S. 2(19AAA) were added to define a
‘demerger’ and a ‘demerged company’ respectively. Further, a need was felt that the benefit
of this section also be extended to hotels and to banks and hence an amendment was made
in this section by the Finance Act, 2003 and the benefit was extended to hotels as well as
banks. Now this will also extend to the business of operation of aircraft with one or more
Public Sector Company or companies engaged in similar business with effect from 1.4.2008
by the Finance Act, 2007.
The section has prescribed a definition of accumulated loss23 and unabsorbed depreciation24
which would be the subject matter of set off or carry forward in the hands of the business
entity resulting out of the reorganisation. This section does not apply to a merger of cooperative
societies.25
Section 72A is an exception to the rule that the depreciation and business loss can be carried
forward by a person who has incurred the loss. Section 72A is applicable in the following
cases:
1. Amalgamation of companies.
2. Demerger
3. Conversion of a proprietary concern/firm into company.
4. Amalgamation of a banking company with a banking institution.
Amalgamation
23 S. 72A(7)(a) provides that accumulated loss refers to the loss under the head “Income from Business and
Profession” which the entity present prior to the reorganisation would have been entitled to set-off or carry
forward u/s 72 had the reorganisation not taken place.
24 S. 72A(7)(b) provides that unabsorbed depreciation is the depreciation which would have been allowed
to the entity present prior to the reorganisation if the reorganisation would not have taken place.
25 Rajasthan Rajya Sahkari Spinning & Ginning Mills Federation Ltd v. ITAT, [2003] 260 ITR 167 (Raj.)
9
1. Conditions to be followed: The accumulated loss shall be not allowed to be carried
forward if the following conditions are not complied with
a. Amalgamating company
i. Has been engaged in the business, in which the accumulated loss
occurred or depreciation remained unabsorbed, for three or more
years.
ii. Has held continuously, as on the date of the amalgamation, at least
three-fourths of the book value of fixed assets held by it two years
prior to the date of the amalgamation
b. Amalgamated Company
i. Holds continuously for a minimum period of five years from the date
of amalgamation at least three-fourths of the book value of the fixed
assets of the amalgamating company acquired in the scheme of
amalgamation.
ii. Continues the business of the amalgamating company for a minimum
period of five years from the date of the amalgamation.
iii. Such other conditions as may be prescribed.26
2. Amalgamating company owning an industrial undertaking Where a company owns
an industrial undertaking as defined by S. 72A(7)(aa), then the conditions to be
complied with by the amalgamating company increase. An Industrial Undertaking is
defined as an undertaking engaged in
a. The manufacture or processing of goods
b. The manufacture of computer software
c. The business of generation or distribution of electricity or any other form of
power
d. The business of telecommunication services (basic or cellular) including radio
paging, domestic satellite service, network of trunking, broadband network
and internet services.
e. Mining
f. The construction of ships, aircrafts or rail systems
26 See Amalgamating company owning an industrial undertaking.
10
If a company owning such an undertaking undergoes amalgamation, then Rule
9C of the Income Tax Rules provided that the amalgamated company will have
to further comply with the following conditions.
i. A level of production of at least 50 percent of the installed
capacity27 shall be obtained before the end of four year from the
date of amalgamation and the said minimum level of production
shall be maintained till the end of five years from the date of the
amalgamation. This requirement may be relaxed by the Central
Government, with respect to the time period as well as the level of
production, having regard to the genuine efforts and circumstances
preventing such efforts made by the amalgamated company, so
shown by means of an application.
ii. A certificate verified by an accountant28 in Form No. 62 along with
other documents showing particulars of production, the return of
income for the year in which the prescribed level of production is
achieved and for subsequent assessment years relevant to the
previous years falling within five years from the date of
amalgamation.
3. Company owning a ship or a hotel A company owning a ship or a hotel undergoing
an amalgamation with another company fulfilling the conditions enlisted by S.
72A(2)29 would be entitled to claim benefit of this section.
4. Banking Company merging with Specified Bank Where a Banking Company30
undergoes a merger with a ‘specified bank’31 and complies with the conditions
abovementioned, then it can claim benefit of the Section.
27 This term refers to the capacity of production as on the date of the amalgamation., See explanation (a) to
Rule 9C
28 Explanation (b) to Rule 9C refers to S. 288(2) of the Income Tax Act which refers to the term
“accountant” to mean a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949
and also includes any person entitled to be appointed to act as an auditor of companies under S. 226(2) of
the Companies Act, 1956
29 See Conditions to be Followed
11
5. Result of compliance with the Section As result of the compliance with the
conditions mentioned, the accumulated loss and unabsorbed depreciation of the
amalgamating company will be treated as the accumulated loss and the unabsorbed
depreciation of the amalgamated company for the previous year in which the
amalgamation was effected and other provisions regarding set-off and carry forward
shall apply accordingly. Here it must be noted that S. 72(3) of the Act provides that
losses cannot be carried forward for more than 8 assessment years immediately
succeeding the assessment year for which this loss was first computed. But the
wording of S. 72A and the presence of a non-obstante clause gives an impression
that the period of eight years for the losses deemed to be of the amalgamated
company shall start afresh.32
6. Result of Non-compliance Where any of the conditions so specified are not
complied with, then the set-off of loss or the unabsorbed depreciation made in any
previous year in the hands of the amalgamated company shall be deemed to be the
income of the amalgamated company in the year in which such default takes place.33
2. Demerger of an Undertaking of the Company
Conditions to be followed during demerger:
· all property of the undertaking gets transferred to the resulting
company
· all liabilities relating to the undertaking become the liabilities of
the resulting company
· the transfer of the liabilities and the properties above is done at
values appearing in the books of the demerged company
30 See. S. 5(c) of the Banking Regulation Act, 1949
31 Defined under S. 72A(7)(c) means the SBI or it’s subsidiary under the State Bank of India Act, 1955 or a
corresponding new bank constituted under S. 3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 or S. 5 of the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980.
32 Jignesh R. Shah, Set-off and Carry-forward of losses: Some issues, (2000) 241 ITR Journal 1.
33 S. 72A(3) of the I.T. Act.
12
· the resulting company must issue shares to the shareholders of
the demerged company as a result of the transfer of the
undertaking.
· The shareholders holding not less than three-fourths in value of
the shares of the demerged company (other than such
shareholder who are nominees of the resulting company or it’s
subsidiary) become shareholders of the resulting company
otherwise than as a result of the acquisition of property or assets
of the demerged company by the resulting company
· The undertaking is on a going concern basis
· The demerger is in accordance with the conditions specified by
the central government.
i. Where loss and unabsorbed depreciation can be identified with the
undertaking(s) transferred In such as case, the loss and unabsorbed
depreciation shall be allowed to be carried forward and set-off in the
hands of the resulting company.
ii. Where loss or unabsorbed depreciation not identifiable with undertaking
transferred In such a case, the loss and unabsorbed depreciation shall be
apportioned on the basis of the proportion of the assets of the
undertakings transferred and shall be allowed to be carried forward and
set-off in the hands of the resulting company.
3. Succession of a Proprietary Concern by a Company
Where there has been a reorganisation of business in such a manner that a proprietary
concern is succeeded by a company, then the losses and unabsorbed depreciation allowance
of the concern can be deemed to be loss and depreciation allowance of the successor
company for the previous year in which such succession occurs only if such as succession is
not a transfer for the purposes of Capital Gains Taxation i.e. it falls under S. 47 (xiv). The
conditions provided under that sections are as follows:
1. The sole proprietor transfers all buildings, plant and machinery and
furniture or other intangible assets to the company.
13
2. All assets and liabilities of the concern relating to the business are
transferred to the company.
3. The shareholding of the sole proprietor is not less then 50% of the voting
capital and that he retains such shareholding for a period of 5 years from
the date of succession.
4. The sole proprietor does not receive any direct or indirect benefit for this
transfer other than shares in the successor company.
If the above conditions are not complied with, then the set-off of loss or the unabsorbed
depreciation allowance shall be treated as income in the hands of the successor company for
the year in which such conditions are not complied with.
4. Succession of Partnership Firm by a Company
Where there has been a reorganisation of business in such a manner that a partnership firm
is succeeded by a company, then the losses and unabsorbed depreciation allowance of the
firm can be deemed to be loss and depreciation allowance of the successor company for the
previous year in which such succession occurs only if such as succession is not a transfer for
the purposes of Capital Gains Taxation i.e. it falls under S. 47 (xiii). The conditions provided
under that sections are as follows:
1. All assets and liabilities of the firm immediately before the succession are
transferred to the company.
2. All partners of the firm immediately before the succession become the
shareholders of the company in the same proportion in which their capital
accounts stood in the books of the firm on the date of the succession.
3. The aggregate of the shareholding of the partners in the company is not less then
50% of the voting capital and that he retains such shareholding for a period of 5
years from the date of succession.
4. The partners do not receive any direct or indirect benefit for this transfer other
than shares in the successor company.
14
If the above conditions are not complied with, then the set-off of loss or the unabsorbed
depreciation allowance shall be treated as income in the hands of the successor company for
the year in which such conditions are not complied with.
Carry forward and set off of losses of a banking company against the
profit of a banking institution under a scheme of amalgamation34
There have been some mergers amongst banks which have come about as a result of
implementation of schemes formulate and sanctioned by the Central Government under S.
45(7) of the Banking Regulation Act, 1949. For these purpose, amendments were brought
about by Finance Act, 2005 by inserting S. 47(viaa), S. 72AA and also amending s.
49(1)(iii)(e).
Following conditions should be satisfied for section 72AA to be applicable:
1. There is an amalgamation of a banking company with any other banking institution.
Banking company for this purpose means a company which transacts the business of
banking in India. A manufacturing or trading company which accepts deposits of
money from the public merely for the purpose of financing its business shall not be
deemed to transact the business of banking. A banking institution for this purpose
means any banking company and includes State Bank of India or a scheduled bank.
2. The amalgamation is sanctioned and brought into force by the Central Government
under section 45(7) of the Banking Regulation Act, 1949.
3. The provisions of section 2(1B)(i)/(ii)/(iii) may or may not be satisfied.
4. The provisions of section 72A may or may not be satisfied.
If the above conditions are satisfied, the accumulated loss and unabsorbed depreciation of
the amalgamating banking company shall be deemed to be the loss or the allowance for
depreciation of the banking institution for the previous year in which the scheme for
amalgamation is brought into force.
34 Section 72 AA of the I.T. Act.
15
By the Finance Act, 2007 section 72AB has been inserted after section 72AA which deals
with the carry forward and set off of accumulated loss and unabsorbed depreciation
allowance in business reorganization of cooperative banks. This section will come into force
from 1.4.2008.
Carry forward and set off of Speculation Loss35.
Where speculative transactions carried on by an assessee are of such a nature as to constitute
a business, the business shall be deemed to be distinct and separate from any other
business36. Speculative transaction means a transaction in which a contract for the purchase
or sale of any commodity, including stocks and shares, is periodically or ultimately settled,
otherwise than by the actual delivery or transfer of the commodity or scrips37.
Section 73 of the Income Tax Act provides that any loss computed in respect of speculation
business carried on by an assessee will not be set off except against the profits and gains, if
any, of another speculation business. Further, where any loss, computed in respect of a
speculation business for an assessment year is not wholly set off in the above manner in the
said year, the excess shall be allowed to be carried forward to the following assessment year
and set off against the speculation profits, if any, in that year, and so on. Explanation to
section 73 provides that the business of purchase and sale of shares by companies which are
not investment or banking companies or companies carrying on business of granting loans
or advances will be treated on the same footing as a speculation business. Thus, in the case
of aforesaid companies, the losses from share dealings will now be set off only against
profits or gains of a speculation business. Where any such loss for an assessment year is not
wholly set off against profits from a speculation business, the excess will carried forward to
the following assessment year and set against profits, if any, from any speculation business.
35 Section 73 of the I.T. Act
36 Explanation 2 to Section 28 of the I.T. Act.
37 Section 43(5) of the I.T. Act.
16
The object of section 73 is to curb the device sometimes restored to by business houses
controlling groups of companies to manipulate and reduce the taxable income of companies
under their control38.
The Explanation to section 73 is applicable only when the purchase and sale of shares is
settled through delivery as where the delivery is not taken it is otherwise a speculation
business. This explanation applies only to a company but shall not apply to the investment
companies and a company whose principal business is of banking or granting of loans/
advances. The word ‘any part’ given in the explanation cannot be said to be used in a
restrictive sense so as not to include the whole. The explanation is attracted even where the
entire business of the company was in share dealing39. The explanation does not require that
both sale and purchase should take place in the same year. All that the explanation requires is
that the business of the company consists of the sale and purchase of shares40. Explanation
to section 73 has no application in the course of purchase and sale of securities since it
applied only to company shares. This rule will be applicable even if there is no avoidance of
tax by the assessee.
Loss in a speculation business can be carried forward to the subsequent year and set off only
against the profits of a speculation business carried on that year. Such loss can be carried
forward for four assessment years41, immediately succeeding the assessment year for which
the loss was first computed. Continuity of the speculation business in which the loss was
incurred is not necessary for it to be carried forward but the assessee should be the same.
Return of loss should be submitted in time.
Loss in a speculative transaction entered into on behalf of principal, is non-speculative loss
of agent42. Income from forward transactions entered into on behalf of constituents is not
income from speculation business carried on by the assessee43. Where a loss arises from
38 K.Chaturvedi & S.M. Pithisaria, Chaturvedi & Pithisaria’s Income Tax Law Vol.10 (5th edn., New Delhi:
Wadhwa & Company, Nagpur, 2005) at 1421.
39 CIT v. Arvind Investment Co., (1991) 192 ITR 365 (Cal).
40 CIT v. Sun Distributors and Mining Co. Ltd., (1993) 68 Taxman 223 (Cal).
41 Eight years up to the assessment year 2005-06.
42 CIT v. Shah Pratapchand Nowpaji, [1983] 139 ITR 149 (AP).
43 CIT v. Pangal Vittal Nayak & Co.(P.) Ltd., [1969] 74 ITR 754 (SC).
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illegal speculative business, it cannot be carried forward to the subsequent years for set off
against the profits of same speculative business or any other speculative business carried by
the assessee44.
The loss in speculation may also include the loss on account of bad debts, irrecoverable
profits and interest on borrowings. Loss from derivative trading shall be treated as loss from
non-speculative business, if transaction of derivatives is done through NSE or BSE.
Concluding Remarks
The Indian Income Tax law is a highly complicated and confusing document. For the
common man the task of understanding the procedure and provisions of law is daunting, to
say the least. Not only is the process of tax calculation very difficult, its practical
implementation is tedious and cumbersome. However, under the law, the taxpayer is
legitimately entitled to plan his taxes in such a manner that his tax liability is minimal.
Tax provisions about setting off losses are, indeed, a bit complex. One needs to file income
tax returns within the due date for availing the benefit of losses to reduce future tax liability.
Adjustment or carry forward of loss is not an inherent right. One requires specific provision
in the Act permitting such right. But, once such a right is available, an assessee cannot, by
choice, forego it in one year and choose to exercise it in the second year, when he expects a
much higher income.
The provisions of the Income Tax have a direct bearing on the citizens of the country. In
fact its not just the citizens but all those who come with in the ambit of the term ‘assessee’
are bound to comply with provisions of the Act. In the case of a non-resident, his foreign
income is not included in his total income which is to be computed subject to the provisions
of section 73. If the total income is loss, it has to be carried forward subject to the provisions
44 CIT v. KurjiJinabhaiKotecha, (1977) 107 ITR 101 (SC).
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of section 73(2) and cannot be set off against any income which does not form part of the
total income. Otherwise, a non-resident would not get any relief in Indian taxation on
account of the loss incurred by him in India.
The assessee is bound to make a clear and unambiguous statement of his income to the
concerned income tax official. Thereupon the assessment function, as prescribed under the
Act, follows whereupon the determination of the tax liability is computed on the basis of the
return filed or on other basis (if the Act so provides and entails the circumstance for such
purposes). Thus one finds that the assessment function forms the bulk of the procedural
aspect of the Income Tax law. Further, it is important to note that since filing of return is
compulsory (Section 139), the provisions are compulsorily to be abided by all the assessee.
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