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Order For Setting Off Losses

Sasidhar Aruljothi (C.A FINAL) (187 Points)

11 December 2010

Guys and Gals,

What is the general order of settig off of losses?ie., first depriciation loss and then business loss or is it vice versa?

The assessee has business loss and depriciation loss for the period 2003-04 to 2005-06, and profits from 2006-07 onwards. Now while setting off can the assessee exhaust the entire business loss and then come to depriciation loss, or should he set off the business loss and depriciation loss of the first year and then only come to the succeding year? Let me know if the methods can be adopted to set off losses. In case my question is not clear let me know, i will try to reframe it.......

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3 Replies

Paresh Rathod (CA) (222 Points)
Replied 11 December 2010

Effect should be given to current years loss first.

Assessee does not have any option - Section 72 provides for carry forward of loss only when such loss cannot be set off against income under any other head. Under the Act, there is no provision which give option to the assessee to show the profit as income from one source and carry forward the loss from another source of income to the next year - CIT v. Milling Trading Co. (P.) Ltd. [1994] 76 Taxman 389 (Guj.).

Current depreciation must be deducted first - Current depreciation must be deducted first before deducting the unabsorbed carried forward business losses of earlier years. Such losses cannot be given preference over current depreciation in the matter of set off in computing an assessee’s income for any particular assessment year - CIT v. Mother India Refrigeration Industries (P.) Ltd./Hindustan Vacuum Glass Ltd. v. CIT [1985] 155 ITR 711 (SC)/CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (SC).

Partial set off and partial carry forward is not permissible - The section does not permit the assessee to have only a part of the loss to be set off against income from other heads and carry forward the balance. Such computation would be wholly artificial, contrary to accepted principles of accountancy and will not reflect the correct income of the assessee in any particular year - G. Atherton & Co. v. CIT 1989 Tax LR 13 (Cal.)

Paresh Rathod (CA) (222 Points)
Replied 11 December 2010

Example

M/s. Vivitha & Co., a partnership firm, with four partners A, B, C and D having equal shares,
furnishes the following details, summarized from the valid returns of income filed by it :
Assessment year Item eligible for carry forward and set off
2006-07 Unabsorbed business loss Rs. 1,20,000
2007-08 Unabsorbed business loss Rs. 1,90,000
2007-08 Unabsorbed depreciation Rs. 1,20,000
2007-08 Unabsorbed long-term Capital losses:
-from shares Rs. 1,10,000
-from building Rs. 1,90,000

C who was a partner during the last three years, retired from the firm with effect from
1.4.2007.
The summarized results of the firm for the assessment year 2008-09 are as under:
Rs.
Income from house property 70,000
Income from business:
Speculation 2,20,000
Non-speculation (-) 50,000
Capital gains
Short-term (from sale of shares) 40,000
Long-term (from sale of building) 2,10,000
Income from other sources 60,000
Briefly discuss, how the items brought forward from earlier years can be set off in the hands of
the firm for the assessment year 2008-09, in the manner most beneficial to the assessee.