FAQ on Loss carried forward

Everybody tries to earn profit, but sometime even best of effort produces losses. Income Tax Act has provisions to adjust the losses from one head to another , within own head and if losses still remain, facility of carry forward to specified years and adjusting in any future years . These provisions are contained in Chapter VI of the I T Act titled "Aggregation of Income And set off or carry forward and set off of losses" .
Seventeen frequently asked questions have been answered below

Question 1 : Can intra head set off of losses optional to assessee?
Answer 1: No. assessee has no option but to set off of looses of one head with income of another head. Ifassessee does not do, A.O is bound to do the adjustment.

Question 2 :Can assessee postpone set off of losses u/s 70?
Answer : No

Question 3 : Can the losses of an assessee who is beneficiary of a trust , out of his shares in losses of trust , be set off with his income ?
Answer : Yes, only if A.O assesses him separately. Refer CIT vs Smt Veenaben Vadilal 197 ITR 156 (Guj)
Question 4: If a person has more than one business , can loss of one business be set off with income of another business ?
Answer 4 : Yes, however loss of discontinued business can be set off with income of a business which is being continued. Refer South India Industries Ltd vs CIT 3 ITR 11 (Madras).However , it is not necessary that the source must be in existence throughout the relevant year. Refer Hulasilal Ramdayal 9 ITR 635 (Allahabad ).

Question 5: Can loss from one source of income , which is exempt from tax , be set off against income from other source?
Answer 5: No. Refer India Malwa United Mills Ltd vs CIT (45 ITR 210 (S.C)
And CIT vs Harprasad & Co 99 ITR 118 (SC)
Question 6 :Can loss suffered by non resident outside India be adjusted with income tax able in India?

Answer 6: No . But in case of resident, he can adjust the loss suffered outside India with income in India . P MMuthuraman Chettiar & Anr vs CIT 44 ITR 710 (SC). Also refer the S.C judgment in CIT vs MahalaxmiSugar Mills Co Ltd 160 ITR 920 . Also refer the decision of Madras High court in case of CIT vs S SThiagarajan (1981) [129 ITR 115 ] which did not allow set off losses from exempt income source with income of another sources.

Question 7 : Can loss of illegal business be allowed to be set off with i9ncome of legal business ?
Answer 7 : No ., refer CIT vs Kurji Jinabhai Kotecha 107 ITR 101 (SC) . Similarly , loss of illegal speculation business are also not allowed to be set of with legal speculation business . Refer CIT vs S.C Kothari 82 ITR794 (SC) and also ADD.CIT vs RanjitSinhji Oil Mills Pvt Ltd 103 ITR 405 

Question 8 : What are exceptional rule of inter-head adjustmnet of losses?

Answer : The general rule of adjustment of loss of one head against another head has following four exception

1. Speculation loss can be adjusted with speculation gain only.
2. Loss from activity of owning and maintaining horses can not be set off against any head of income from any sources as per section 74A of the I T Act. Other than maintaining of horses.
3. Losses from gambling can not be set off against any other income, not even another gambling income.
4. Long term loss can be set off with long term gain only.

Question 9 : Can losses from house property be carried forward if one does not file return within due period,?
Answer : Yes, the losses from house property can be carried forward and set off in subsequent years even when the return u/s 139(1) is not filed within due time.
Question 10 : Is filing of return within due time important for carry forward of losses?

Answer : The losses has to be determined first in order to be set off. As per section 80, unless return is filed u/s 139 the loss can not be determined.. Following losses are not allowed to be carried forward unless return is filed in accordance with the provision of sub section 3 of section 139

1. Business loss (Sec. 72(1))
2. Speculation loss (sec 73(2))
3. Losses under capital gains (74(1).
4. Losses from horse maintenance (74A(3).

Loses must be determined by A.O , otherwise it is not allowed to be carried forward .
CIT vs Haryana Hotels Ltd 276 ITR 521 (Punj & Haryana )
Question 11 : Is clubbing provisions applicable in case of losses also?

Answer : As per CBDT circular 104 dated 19.2.73 and also judicially , income include loss. Therefore, just as income of certain persons –like minor or others are clubbed with other person as per section 60 to section 64 , losses can also be clubbed and adjusted . Refer Supreme Court decision in case of

1. CIT vs P.Doraisamy Chetty 183 ITR 559
2. CIT vs J M Gotla 156 ITR 323

Question 12: Has assessee the right to carry forward the losses if the AO has not intimated him the losses assessed?
Answer : Yes , .Refer order of Mysore High Court in case of G. R. J Reddy vs CIT ,68 ITR 813 .

Question 13: Can loss be claimed even after the expiry of date of filing of return ?

Answer : Yes, an application to the Commissioner or Chief Commissioner or to the Board can be made u/s 119(2)(b) of the I T Act may be made for condoning the delay in filing and return and if allowed by the said authorities , claim of loss or refund can be entertained. In this regard , CBDT's circular No 8 of 2001 dated 16/5/2001 should be referred.

Question 14: Can losses of one industry be set off before claiming exemption u/s 10 A/ 10B of the I T Act?

Answer 1: No , because the exemption u/s 10A or 10 B are special scheme of taxation to encourage the setting up of businesses . Therefore, losses earned in one industry can not wipe out the benefit available by enactment to another industry. Reference may be taken to Canara Workshop 161 ITR 320 in which Apex Court held “ An industry entitled to the benefit of of sec.80E could have its profits wholly wiped out on adjustment against a heavy loss suffered by another industry and thus be totally denied the relief which should have been its due by virtue of its profits. In our opinion , each industry must be considered on its own working only when adjudging its title to the deduction u/s 80E. It can not be allowed to suffer because it keeps company with some other industry in the hands of the assessee.

Question 15 :Whether loss can be carried forward by Industry exempt u/s 10A/10B after the sunset year i.e year from which the exemption is withdrawn?

Ans: Yes, undertakings getting exemption u/s 10A /10B of the I T Act are allowed to carry forward the loss even for the year exemption is withdrawn by virtue of sub section 6(ii) of the section 10A/10B which was introduced with retrospective effect from Asst Yr 2001-02.

Question 16 :Whether loss can be carried forward by Industry exempt u/s 10C after the sunset year i.e year from which the exemption is withdrawn?

Answer 16 : No , because no such provision , as was introduced in section 10A/10B , was brought in section 10 C. So , undertaking having exemption u/s 10C are not allowed to carry forward the loss beyond the year when exemption stops.

Question 17 Whether speculation loss can be set off with dividend income?

Answer : Yes, only if the dividend is product or profit earned during the course of speculation business. This is as per ration of Mumbai Tribunal in case of Star Line Ispat & Alloys (2007) 14 SOT 140 (Mum) which held that dividend by itself is not speculative profit, but certainly is a profit out of speculation business.