Things You Must Know Before You Carry Forward and Set Off of Business Losses

The unadjusted loss under the head ‘Profit and Gains of business or profession’, excluding the loss of a speculation business) for the assessment year in which such loss arises shall be carried forward to the following assessment year(s) and it shall be set off against the profits and gains of any business or profession carried on by him during such assessment year(s). However, such carry forward and set off of losses is based on the following considerations:

• Existence of the same business not essential during the year of setting off: From the assessment year 2000-01, it I not necessary that the business or profession for which the loss was originally computed should continue to be carried on by him at least for a part of the previous year in which the brought forward loss is sought to be set off. It means that unadjusted loss from business or profession for any previous year shall be carried forward for set off to the following assessment year(s) even if such business or profession is discontinued.
• Set off permissible only against business income (both speculative and non-speculative): Brought forward business loss can be set off against the profits or gains of any business (both speculative and non-speculative) or profession carried on by the assessee during the previous year. However, the profit or gain which arises as a result of business activities but not taxable under the head ‘and Gains of business or profession’ shall also be available for the purpose of setting off of such business loss. For example, dividend from shares of all nature referred to in section 2(22)(e) [ not exempt under section 10(34)] held by the assessee as stock-in-trade of the business is made available for the purpose of setting off of the business loss though such dividend is chargeable to tax under the head ‘Income from other sources’.
• Maximum period specified for carry forward of losses: Unadjusted business loss can be carried forward for a period of 8 years assessment year immediately succeeding the assessment year for which the loss was first computed (such period o 8 years is to be reckoned from the year of revival of the discontinued business covered by section 33B and from the year in which the amalgamation has taken place covered by section 72).
• Period to carry forward unabsorbed depreciation allowance: Carry forward of unabsorbed depreciation is governed by section 32(2). There is no time limit for carry forward of unabsorbed depreciation allowance.
• Right to carry forward vested on the assessee: Only the assessee who has suffered the loss has the right to carry forward such unadjusted business loss. The following are the exceptions to this rule:

1. Amalgamated company has the right to carry forward the business loss of the amalgamating company [sec. 72(A)1];
2. Resulting company has the right to carry forward and set off of the unadjusted business losses of the demerger company [sec. 72(4)];
3. The person inherited a business has a right to carry forward the business loss of the said business before inheritance.

Thus, we observe that there are many options available to an individual for providing a set off of business losses.

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2. Carried Forward & Set-off of Losses
3. Concept of Carry Back of Losses – Expectation Budget 2012-13
4. Taxpayers Can Adjust Loss With Less Liability
5. Know your taxability under Profit and Gains of Business or Profession?