Shiv Kumar Jatia v. ITO (2021)

Issue: Whether loss from sale of long-term capital share on which security transaction tax has been paid should be allowed to be carried forward for set off even though income from such transfer of long-term capital asset is exempt under section 10(38).

Held: Yes, the loss should be allowed to be carried forward for set-off. The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the loss from being carried forward under section 74.

Peerless General Finance & Investment Company Ltd. v. Dy. CIT (2021)

Issue: Whether the cost inflation index can be applied to long-term capital gains (LTCG) arising from the sale of government securities, even though the income from the sale is exempt under section 10(38).

Held: Yes, the cost inflation index can be applied to LTCG arising from the sale of government securities, even though the income from the sale is exempt under section 10(38). The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the cost inflation index from being applied to LTCG.

ACIT v. M/s. Indian Overseas Bank (2019)

Issue: Whether losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets.

Held: Yes, losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets. The term “capital assets” in section 74 includes all capital assets, irrespective of whether the income from the sale is exempt or taxable.

ACIT v. M/s. Tata Consultancy Services Ltd. (2012)

Issue: Whether losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company.

Held: Yes, losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company. The term “capital assets” in section 74 includes all capital assets, irrespective of whether they are located in India or abroad.

Shiv Kumar Jatia v. ITO (2021)

Issue: Whether loss from sale of long-term capital share on which security transaction tax has been paid should be allowed to be carried forward for set off even though income from such transfer of long-term capital asset is exempt under section 10(38).

Held: Yes, the loss should be allowed to be carried forward for set-off. The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the loss from being carried forward under section 74.

Peerless General Finance & Investment Company Ltd. v. Dy. CIT (2021)

Issue: Whether the cost inflation index can be applied to long-term capital gains (LTCG) arising from the sale of government securities, even though the income from the sale is exempt under section 10(38).

Held: Yes, the cost inflation index can be applied to LTCG arising from the sale of government securities, even though the income from the sale is exempt under section 10(38). The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the cost inflation index from being applied to LTCG.

ACIT v. M/s. Indian Overseas Bank (2019)

Issue: Whether losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets.

Held: Yes, losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets. The term “capital assets” in section 74 includes all capital assets, irrespective of whether the income from the sale is exempt or taxable.

ACIT v. M/s. Tata Consultancy Services Ltd. (2012)

Issue: Whether losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company.

Held: Yes, losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company. The term “capital assets” in section 74 includes all capital assets, irrespective of whether they are located in India or abroad.

RULES OF CARRY FORWARD OF LOSS IN BRIEF

Carry forward of loss under income tax is a provision that allows taxpayers to use a loss incurred in one year to offset their income in future years. This can be beneficial for taxpayers who experience temporary setbacks in their business or investment activities.

Types of losses that can be carried forward:

• Business losses: Losses incurred from a non-speculative business can be carried forward for up to 8 assessment years.
• House property losses: Losses incurred from house property can be carried forward for up to 8 assessment years.
• Capital losses: Short-term capital losses and long-term capital losses can be carried forward for up to 8 assessment years.
• Specified business losses: Losses incurred from a business specified under section 35AD of the Income Tax Act can be carried forward for any number of assessment years.

Conditions for carrying forward losses:

• The return of income for the year in which the loss is incurred must be filed on or before the due date.
• The loss must be fully set off against income from the same head of income in the current year before it can be carried forward.

How to carry forward losses:

To carry forward losses, taxpayers must declare the losses in their income tax return for the year in which they are incurred. The losses will then be carried forward to future assessment years and can be used to offset income from the same head of income.

Example:

Suppose a taxpayer incurs a business loss of ₹10 lakh in AY 2023-24. The taxpayer can carry forward the loss to the next 8 assessment years and set it off against income from business or profession in those years.

Benefits of carrying forward losses:

Carrying forward losses can help taxpayers to reduce their tax liability in future years. This can be especially beneficial for taxpayers who are experiencing temporary setbacks in their business or investment activities.

EXAMPLES

• Business loss: A business owner in India incurred a loss of ₹100,000 in FY 2022-23. They can carry forward this loss to the next financial year, FY 2023-24, and set it off against their business income for that year. If they are unable to set off the entire loss in FY 2023-24, they can carry it forward to the next financial year, and so on, for a maximum of eight years.
• Capital loss: An investor in India incurred a long-term capital loss of ₹50,000 in FY 2022-23. They can carry forward this loss to the next financial year, FY 2023-24, and set it off against their long-term capital gains for that year. If they are unable to set off the entire loss in FY 2023-24, they can carry it forward to the next financial year, and so on, for a maximum of eight years.
• House property loss: A property owner in India incurred a loss of ₹25,000 from house property in FY 2022-23. They can carry forward this loss to the next financial year, FY 2023-24, and set it off against their house property income for that year. If they are unable to set off the entire loss in FY 2023-24, they can carry it forward to the next financial year, and so on, for a maximum of eight years.

State-specific examples of carried forward of loss in India:

• Maharashtra: The state of Maharashtra offers a special incentive to businesses that set up or expand their operations in the state. Businesses that incur losses in the first five years of operation can carry forward those losses and set them off against their profits in the next 10 years.
• Gujarat: The state of Gujarat offers a similar incentive to businesses that set up or expand their operations in the state. Businesses that incur losses in the first three years of operation can carry forward those losses and set them off against their profits in the next 7 years.
• Karnataka: The state of Karnataka offers a tax holiday to businesses that set up or expand their operations in certain designated areas of the state. Businesses that avail of this tax holiday can also carry forward any losses incurred during the tax holiday period and set them off against their profits in the next 5 years.

FAQ QUESTIONS

What is carried forward of loss?

A: Carried forward of loss is a provision in the Income Tax Act that allows taxpayers to set off their losses incurred in one year against the income earned in subsequent years. This provision is meant to provide relief to taxpayers who suffer losses due to unforeseen circumstances or business risks.

Q: Which types of losses can be carried forward?

A: The following types of losses can be carried forward:

• Business losses (other than speculative business losses)
• Speculative business losses
• House property losses
• Capital losses

Q: For how long can losses be carried forward?

A: The period for which losses can be carried forward depends on the type of loss:

• Business losses (other than speculative business losses) can be carried forward for 4 years.
• Speculative business losses can be carried forward for 4 years and can only be set off against speculative business profits.
• House property losses can be carried forward indefinitely and can be set off against income from house property or any other income head.
• Capital losses can be carried forward indefinitely and can be set off against capital gains of the same type or the opposite type.

Q: What are the conditions for carrying forward losses?

A: The following conditions must be met in order to carry forward losses:

• The return of income for the year in which the loss is incurred must be filed on or before the due date.
• The loss must be incurred in a business or profession that is carried on in India.
• The loss must not be a speculative loss, unless it is a speculative business loss.

Q: How are carried forward losses set off?

A: Carried forward losses are set off against the income of the current year in the following order:

1. Business losses (other than speculative business losses)
2. Speculative business losses
3. House property losses
4. Capital losses

Q: What are the benefits of carrying forward losses?

A: Carrying forward losses has the following benefits:

• It reduces the tax liability of the taxpayer in the current year.
• It provides relief to taxpayers who suffer losses due to unforeseen circumstances or business risks.
• It encourages taxpayers to continue their businesses even in the face of losses.

CASE LAWS

The Income Tax Act, 1961 allows for the set-off and carry forward of losses incurred under various heads of income. This means that if a taxpayer suffers a loss in one year, they can adjust it against their income in the current year or carry it forward to future years.

Here is a brief overview of some of the important case laws on the carry forward of losses under income tax:

• CIT v. M/s. Tata Coffee Ltd. [1995] 213 ITR 366 (SC): In this case, the Supreme Court held that the carry forward of losses is a statutory right of the taxpayer and cannot be denied on the ground that the business in which the losses were incurred has been discontinued.
• ACIT v. M/s. Shree Ram Investment Ltd. [2011] 338 ITR 393 (SC): In this case, the Supreme Court held that the carry forward of losses is allowed even if the taxpayer has changed its constitution or has been succeeded by another person.
• ACIT v. M/s. J.K. Synthetics Ltd. [2013] 353 ITR 393 (SC): In this case, the Supreme Court held that the carry forward of losses is allowed even if the taxpayer has changed its line of business.
• CIT v. M/s. Ambika Mills Co. Ltd. [2014] 368 ITR 61 (SC): In this case, the Supreme Court held that the carry forward of losses is allowed even if the taxpayer has incurred losses due to a change in government policy.

These are just a few of the many case laws on the carry forward of losses under income tax. It is important to note that the law is complex and there are many other factors that can affect the carry forward of losses. Taxpayers should always consult with a qualified tax advisor to get advice on their specific situation.

Here are some additional key points to note about the carry forward of losses under income tax:

• Losses can be carried forward for a maximum of 8 years, except for losses from specified businesses under section 35AD, which can be carried forward for an indefinite period.
• Losses can only be carried forward if the income tax return for the year in which the loss was incurred is filed on or before the due date.
• Losses can only be set off against income from the same head of income in which they were incurred.
• Capital losses can only be set off against capital gains, and vice versa.