What is Net Loss? Is Tax Audit Compulsory in case of Loss ?

What is Loss or Net Loss?

Generally we know that if Expenses is more than Income, then there Loss occurs. It means,
Expenses - Income = Loss (Expense > Income).

In Financial accounting, Loss is a decrease in Net Income that is outside the normal operations (i.e. sales, purchases etc.) of business.

When Loss occurs?

In financial accounting, losses occurs in any of following situations, such as:

Excess of Expenditure over Income
Losses on Sale of Assets (i.e. assets sold less than its value in books of account)
Losses from Lawsuit (where judgement goes against company)
Any costs that produce no benefit
Decrease in value of resources

Is filing of Income Tax Return is mandatory in case of Loss ?

In case of an Individual,
It is not mandatory to file Income Tax Return (ITR) in case of loss for that assessment year.

In case of Firms/ Companies/ Persons want to offset Loss in future years,
It is mandatory to to file ITR even if they suffered Loss.

*Note : If you consistently file your income tax return, then it is better to file ITR even if your income is below taxable limit or loss occurs. Otherwise Income Tax Department may send you a notice for non filing of ITR.

Sec 139(3) of Income Tax Act, says that,

"If any person who has sustained a loss in any previous year under the head "Profits and gains of business or profession" or under the head "Capital gains" and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or sub-section (2) of section 73, [or sub-section (2) of section 73A] or sub-section (1) or sub-section (3) of section 74, or sub-section (3) of section 74A, he may furnish, within the time allowed under sub-section (1), a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1)."

*Note : According to Income Tax Act, Previous Year means Financial Year.

Explanation of Sec 139(3) of Income Tax Act

If you have suffered a loss and want to offset the loss in future years, then you need to file Income Tax Return to reduce tax burden in future years. If you don't file ITR, you will not be eligible to offset Loss in future years.

If Loss occurs under the head "Profits and gains of business or profession" or "Capital gains", then you must file ITR if you want to offset loss against income in future year.
If Loss occurs under "House property", then it is not mandatory to file ITR. Also the loss can be carried forward even if the return filed after due date. If anyone have House Building Loan and files ITR late, then he can still get the benefit of deduction on interest on the loan under sec 24 of Income Tax Act.
The loss of income in the current year cannot be carried forward if the ITR has not been filed within due date. But the loss of earlier years can be carried forward if ITR have been filed for those losses on time and assessed by CPC.
If the loss would be offset against an income within the same year, the setoff will be allowed if the return is filed after due date.
If ITR filed reporting loss after receiving a notice under sec 142(1), the loss cannot be carried forward to next year unless it is a House Property Loss. The Unabsorbed Depreciation can be carried forward.
The loss carried forward, can be offset only against similar heads in the next years (i.e. a loss in "Profits and gains of business or profession" can only be offset against "Profits and gains of business or profession" in next years, cannot be offset with Capital Gains or House Property.)

Q. Is Tax Audit Required in case of Loss ?

A. It depends on several conditions,

If Loss occurred and Total Taxable Income is below threshold limit (2.5 lakh for non senior citizen and 3 lakh for senior citizen), No Tax Audit required.
If Loss occurred in Business and Total Taxable Income exceeds threshold limit, Tax Audit required.

*Note : Total Taxable Income means aggregate of all Income heads.

Explanation :

According to Sec 44AB, an account need to be audited u/s 44AB if Gross Receipts / Turnover exceeds the threshold limit ( 1 Cr. for Business and 50 lakh for Profession) in a financial year and Net Profit is below 8%. Also his Taxable Income should exceed the threshold limit (2.5 Lakh for non Senior Citizen and 3 Lakh for Senior Citizens).

If anyone suffered Loss in Business in a financial Year, then obviously his Net Profit (Net Loss in this case) is below 8%. But it does not satisfy the whole clause of Tax Audit u/s 44AB.

If his Total Taxable Income does not exceed the threshold limit (2.5 Lakh for non-Senior Citizen and 3 Lakh for Senior Citizens), Then No Tax Audit Required, if Total Taxable Income exceeds threshold limit, then account need to be audited.

Is Tax Audit required if Taxpayer is Salaried but suffered Loss in F&O (Futures & Options) Trading?

Generally, F&O Trading is reported as Business. As discussed above, in case of Loss, if Total Taxable Income (Aggregate of all heads of income such as "Income from Salary", "Income from House Property", "Income from other sources" etc.) is below threshold limit (2.5 Lakh for non Senior Citizen and 3 Lakh for Senior Citizens), then No Tax Audit is required.

But if you suffered Loss in F&O Trading and Total taxable Income is above threshold limit, then your books of account need to be audited u/s 44AB.

Also always report your Losses in your Income Tax Return. Your current year losses could be carried forward to next years. Reporting losses will result in Tax Benefits. In case of Non-reporting of Losses, Income Tax Department may send you non-compliance notice

Click here to read ICAI Guidance Note on Tax Audit U/s 44AB of Income Tax Act, 1961.