Set-off of carry forward loss from a discontinued activity

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Suraj S (Querist)
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31 August 2012 One of my client is a private limited company. It is carrying on a business for the past 9 years. During the past so much years it has not been able to make profits from its business. Now the management is keen to lease out its business to another party on the terms of operating lease agreement. So the only income for the company would be the Lease rental and the lone expense being the depreciation of fixed assets and the mere administration expenses. Now, my query is will this company be able to set off its business income with its carry forward losses from previous years? When the company has leased out its business it has stopped/ discontinues its main activity. In such a scenario will it be able to set off its income with the carry forward loss? Does IT Act have a restriction on this part?

Thanks in advance.

CA. Subhash Dangi

CA. Subhash Dangi (Expert)
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31 August 2012 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 33B 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 aforesaid.
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 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).

Suraj S

Suraj S (Querist)
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31 August 2012 But sir, its not clear for me whether i will be able to carry forward the loss to future years or not.

CA. Subhash Dangi

CA. Subhash Dangi (Expert)
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31 August 2012 Since your client has discontinued the business by leased out the business another party, then the benefit of set off and carry forward the business losses of earlier years is not entitled.

Please refer the following link for the latest decided case law

https://www.indiankanoon.org/doc/79027510/

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