Module 4

Tax Planning and Estate Planning

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Set off and Carry
forward of Losses
In order to determine the NET income or NET losses for an Assessment it is necessary to
net off incomes and losses from various sources and heads.

Set off of losses

Where there is a loss from once source/head the Act provides for set off for the same with
income from other source/head . Where the net figure results in an Income the same
is subject to tax in that assessment year.

Carry forward of Losses

Where in any assessment year the net figure arrived after intra head and inter head set off
is a loss , the head provides for the same to be carried forward to the subsequent
Assessment years
Broadly, following is the sequence to be followed for effecting the set off and carry
forward of losses

1. Intra head set off : The losses from one source is set off from the income from
another source under the same head
2. Inter head set off : After arriving at the net income or loss under each head in step 1
losses arising out of one head of income if any, is set off with income if any from any
of the other heads
3. Carry forward of losses : After arriving at the net income or loss under each head, if
there is a loss under any head the same is carried forward to the next assessment
year.
4. Set of Brought forward losses: The losses which are carried forward to the next
assessment year can be set off against income from the same head of income in the
next
Sr Source of Loss Can be set off against
No
1 Long Term capital Loss Long term capital Gain

2 Short Term Capital Loss a. Long term Capital Gain

b. Short Term Capital Gain

3 Loss from Rearing Income from Rearing Horses

Horses only
4 Los s from Speculation Income from Speculation
Business Business only
Sr No Source of Loss
1 Loss from Rearing Horses
2 Los s from Speculation Business
3 Loss from Non Speculation
Business or profession
4 Losses from House Property
5 Salary
Can be set off against
Income from Rearing Horses only
Income from Speculation Business only
Income from
1. Non Speculative Business or profession
2. Speculation Business
3. Short term capital gain
4. Long term capital gain
5. House property
6. Other sources – Other than Rearing Horses
7. Rearing Horses
Cannot be set off against salary income
Income from
1. Non Speculative Business or profession
2. Speculation Business
3. Short term capital gain
4. Long term capital gain
5. House property
6. Other sources – Other than Rearing Horses
7. Rearing Horses
8. Salary
N. A
1. Loss from one house property can be adjusted with profits from another house
property in the same Assessment Year.

2. Any loss under the head 'Income from House property' can be set off against any
other head of income in the same Assessment Year.

3. However, if after such set off, there is still any loss under the head, then the same shall
be carried forward to the next assessment years.

4. It is to be remembered that once a particular loss is carried forward, it can be set off
only against the income from the same head in the forthcoming Assessment Years.

5. The loss under this head is allowed to be carried forward upto 8 Assessment Years
immediately succeeding the AssessmentYear in which the loss was first computed.
1. The loss should have been incurred in business, profession or vocation.

2. The loss should not be in the nature of a loss in the business of speculation which must be
treated separately.

3. The loss may be carried forward and set-off against the income from business or
profession though not necessarily against the profits and gains of the same business or
profession in which the loss was incurred.

4. But a loss carried forward cannot, under any circumstances, be set-off against the income
from any head other than business or profession.

5. A business loss cannot be carried forward for a period which is more than 8 assessment
years immediately succeeding the assessment year for which the loss was first computed.

6. It is not necessary that the business whose loss is being carried forward and set of has to
continue in the in year in which the losses are being set off against income from another
business in the subsequent year.

7. In order to carry forward or set off a loss, the assessee must have filed a return of losses
u/s 139 and such a return should be filed within the time allowed u/s 139(1) or within such
further time as may be allowed by the Assessing Officer.
Only the person who has incurred the loss can use the brought forward business losses for set off.
Hence, business loss can be set off only by the same assessee and cannot be transferred to
another entity or person. However, the following are exceptions to the above condition:

Inheritance: If a business is carried on by one person and is acquired by another person through an
inheritance, the loss can be carried forward by the successor. However, such a business loss can be
carried forward by the successor only for the balance number of years for which the
original assessee could have carried forward the loss.

Amalgamation: Business losses and unabsorbed depreciation of an amalgamating company can

be set off against the income of the amalgamated company.

Conversion of Proprietorship or Partnership into a Company: In case of a reorganisation

of a business whereby a proprietorship or a partnership firm is converted into a company, the
accumulated business loss and the unabsorbed depreciation of the predecessor firm can be carried
forward by the company.

Conversion of Company into LLP: If due to a business reorganisation, a private limited

company or unlisted public company is succeeded by a LLP, then the business loss and unabsorbed
depreciation of the predecessor company can be transferred to the LLP.

Demerger: Loss of the demerged company can be carried forward by the resulting company.
The assessee can carry forward only such an amount of loss

i. as has been determined by the AO and

ii. not disputed by him (i.e., the assessee)

iii. he cannot claim to carry forward the entire amount of loss

returned by him.
1. Speculation is deemed to be a business distinct and separate from any other business carried
on by the assessee.
2. The losses incurred in speculation can be neither set off in the same year against any other non-
speculation income nor carried forward and set off against other income in the subsequent
years against such income.
3. Therefore, if the losses sustained by an assessee in a speculation business cannot be so set-off
in the same year against any non speculation profit.
4. They can be carried forward to subsequent years and set off against income from any
speculation business carried on by the assessee.
5. An assessee who incurred a loss in a business of speculation carried on by him individually is
entitled to set it off against his share of the profits in any other speculation business carried on
by a firm of which he is partner.
6. The loss in speculation business can be carried forward only far a maximum period of 4 years
from the end of the relevant Assessment Year in respect of which the loss was computed.
7. The loss in speculation may also include the loss on account of bad debts, irrecoverable profits
and interest on borrowings.

The other provision in relation to the carry forward of business losses will, as far as may be, applies
to the losses in speculation business as well.
Where for any Assessment Year. the net result under the head “Capital gains” is Short Term Capital
Loss or Long Term Capital Loss, the loss shall be carried forward to the following Assessment Year to
be set off in the following manner :

a. Where the loss so carried forward is Short Term Capital Loss, it shall be set off against any
capital gains, short term or long term, arising in that year.

b. Where the loss so carried forward is Long Term Capital Loss, it shall be set off only against
Long Term Capital Gain arising in that year.

c. Net loss under the head capital gains cannot be set off against income under any other head of
the same Assessment Year.

d. Any unabsorbed loss shall be carried forward to the following Assessment Year up to a
maximum of 8 Assessment Years immediately succeeding the Assessment Year for which the
loss was first computed.
1. The losses incurred by an assessee from the activity of owning
and maintaining race horses cannot be set-off against the
income from any source except the activity of owning and
maintaining race horses.

2. Such loss can be carried forward for a maximum period of 4

Assessment Years, immediately succeeding the assessment year
for which the loss was first computed, for being set-off against
his income from the activity of owning and maintaining race
horses in the subsequent years.

3. If however, the assessee does not have the activity of owning

and maintaining race horses during the year in respect of which
the set-off is claimed, he would not qualify for the set-off.
1. Current year depreciation.
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.
4. Unabsorbed depreciation.
5. Unabsorbed capital expenditure on scientific research.
6. Unabsorbed expenditure on family planning.
Rules for Intersource Set off
Sr No Head Source of Loss Source of Income
1 Business an Profession Speculative Rearing HorsesNon Sepeculative
Rearing Horses Not Permitted Permitted Not Permitted
Speculative Permitted Not PermittedNot Permitted
Non Sepculative Permitted Permitted Permitted

2 Capital Gains STCG LTCG

STCL Permitted Permitted
LTCL Not Permitted Permitted
Rules for Inter-Head Set off
Sr No Source of Loss Section Source of Income

Income
from Other
PGBP - Income Income Sources
PGBP - Non from House from Other Rearing
1 Speculative Sepeculative LTCG STCG Property Salary Sources Horses
PGBP - Non Not
Sepculative 72 Permitted Permitted Permitted Permitted Permitted Permitted Permitted Permitted
PGBP - Not Not Not Not Not Not Not
Sepculative 73 Permitted Permitted Permitted Permitted Permitted Permitted Permitted Permitted
Short term Not Not Permitted Permitted Not Not Not Not
2 Capital Loss 71(3) Permitted Permitted 70(2) 70(2) Permitted Permitted Permitted Permitted
Long term Not Not Permitted Not Not Not Not Not
Capital Loss 71(3) Permitted Permitted 70(3) Permitted Permitted Permitted Permitted Permitted
Loss from
House Permitted Permitted Permitted Permitted Permitted Permitted Permitted Permitted
3 property 71B
4 Salary NA NA NA NA NA NA NA NA
Income from
Other sources Not Not Not Not Not Not Not
5 (Race Horses) 74A Permitted Permitted Permitted Permitted Permitted Permitted Permitted Permitted
No loss shall be carried forward and set off under
1. sub-section (1) of section 72 (loss from Business or profession)
2. sub-section (2) of section 73 (loss from Speculation)
3. sub-section (2) of section 73A (loss from Specified Business)
4. sub-section (1) or sub-section (3) of section 74 (Capital Gains)
5. sub-section (3) of section 74A.(Other sources – Race Horses)
unless a return of loss has been filed within the time prescribed
under Sec 139(1)
What is amalgamation?
An amalgamation is, in fact, a specific subset within a broader group of “business
combinations”. There are three main types of business combinations, which are outlined
below in more detail. It’s important to understand the subtle differences when talking
about mergers, acquisitions, and amalgamations.

Acquisition (two survivors): The purchasing company acquires more than 50% of the
shares of the acquired company and both companies survive.

Merger (one survivor): The purchasing company buys the selling company’s assets. The
sale of the acquired company’s assets leads to the survival of only the purchasing
company.

Amalgamation (no survivors): This third option creates a new company in which none of
the pre-existing companies survive.

As you can see with the above examples, the difference comes down to the surviving
companies. In an amalgamation, a new company is created and none of the old
companies survive.
Amalgamation, in relation to companies, means the

1. The merger of one or more companies with another company or

2. The merger of two or more companies to form one company

The company or companies which so merge being referred to as the amalgamating company or
companies and the company with which they merge or which is formed as a result of the
merger, as the amalgamated company) in such a manner that—

a. All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation

b. All the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of the
amalgamation.

c. Shareholders holding not less than three-fourths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the
amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become
shareholders of the amalgamated company by virtue of the amalgamation.
Amalgamation
This section applies where there has been an amalgamation of
1. a company owning.
a. an industrial undertaking or
b.a ship or
c. a hotel
with another company or

2. an amalgamation of a banking company with a specified bank.

3. one or more public sector company or companies engaged in

the business of operation of aircraft with one or more public sector
company or companies engaged in similar business,
Amalgamation

The Section provides that the

i. accumulated loss and

ii. unabsorbed depreciation of the

amalgamating company shall be deemed to be the loss or

depreciation, as the case may be, of the amalgamated company for

the Previous Year in which the amalgamation took place.

Amalgamation – Conditions to be fulfilled
By the amalgamating company —
1. The amalgamating company should have been engaged in the business, in which the
accumulated loss occurred or depreciation remains unabsorbed, for 3 or more years.
2. The amalgamating company has held continuously as on the date of amalgamation at least
3/4th of the book value of the fixed assets held by it, 2 years prior to the date of amalgamation.

By the amalgamated company -

1. The amalgamated company should hold at least 3/4th in the book value of fixed assets of the
amalgamating company acquired as a result of amalgamation for a minimum period of 5 years
from the effective date of amalgamation.
2. The amalgamated company continues the business of the amalgamating company for at least
5 years.
3. The amalgamated company must also fulfill such other conditions prescribed for the
revival of that business of the amalgamating company or to ensure that the amalgamation is
for genuine business purpose -
Amalgamation – Conditions to be fulfilled

1. The amalgamated company shall achieve the level of production of at least 50% of the

installed capacity (capacity as on the date of amalgamation) of the said undertaking before

the end of 4 years from the date of amalgamation and continue to maintain the said minimum

level of production till the end of 5 years from the date of amalgamation. Central Govt. Has the

power to modify this requirement on an application made by the amalgamated company.

2. The amalgamated company shall furnish to the Assessing Officer a certificate in Form No.62

verified by a Chartered Accountant in this regard.

In case the above specified conditions are not fulfilled, that part of carry forward of loss and
unabsorbed depreciation remaining to be utilized by the amalgamated company shall lapse and
such loss or depreciation as has been set off shall be treated as the income in the year in which
the failure to fulfill the conditions occurs.
Demerger
Where there has been a demerger of an undertaking, the accumulated loss and the unabsorbed
depreciation directly relatable to the undertaking transferred by the demerged company to the
resulting company shall be allowed to be carried forward and set off in the hands of the resulting
company.

If the accumulated loss or unabsorbed depreciation is not directly relatable to the undertaking, the
same will be apportioned between the demerged company and the resulting company in the same
proportion in which the value of the assets have been transferred. The section also confers powers
upon the Central Govt. to notify such conditions as it considers necessary to ensure that the
demerger or amalgamation is for genuine business purpose.

However, this facility will not be available if it is found that any of the conditions lay down in the
corresponding sub-sections (xiii) and (xiv) of section 47 have not been complied with. In such case,
the set-off of loss or allowance of depreciation made in any P.Y. in the hands of the successor
company shall be deemed to he the income of the company chargeable to tax in the year in which
the conditions have been violated.
Re-organisation of business [Section 72A(4)]

In case of re-organisation of business, whereby

1. a firm is succeeded by a company as per the provisions of section 47(xiii), or

2. a sole proprietary concern is succeeded by a company as per the provisions

of section 47(xiv),

then the accumulated business loss and the unabsorbed depreciation of the firm
/ proprietary concern, as the case may be, shall be deemed to be the loss or
depreciation allowance of the successor company for the Previous Year in which
the business re-organisation took place. Other provisions of the Act relating to
set- off and carry forward will apply accordingly.
Thank you