Business-Loss-Carry-Forward

Business Loss Carry Forward

Business Loss Carry Forward

Taxpayers who are engaged in doing business can incur losses owing to various reasons. The Income Tax Act allows taxpayers to set off business losses against other incomes earned in the same financial year. Business loss under the head “profits and gains of business or profession” other than a loss from speculation business and loss from specified businesses can also be carried forward to future years if it cannot be set-off in the same assessment year. In this article, we look at the conditions attached to carrying forward a business loss under the provisions of the Income Tax Act.

Period of Business Loss Carry Forward

Business loss can be carried forward for a period of eight years. However, each year’s loss must be treated as a separate loss. Though business loss can be carried forward for eight years only, the following types of expenses can be carried forward indefinitely:

  • Unabsorbed depreciation.
  • Unabsorbed capital expenditure on scientific research.
  • Unabsorbed expenditure on family planning.

Order of Set-Off of Business Loss

As mentioned above, unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed expenditure on family planning can be set off. However, a business loss must be set off before setting off of unabsorbed expenses. Therefore, the order of set-off of business loss is as under:

  1. Current year depreciation.
  2. Current year capital expenditure on scientific research and current year expenditure on family planning to the extent admissible under the provisions of the Act.
  3. Brought forward business or profession losses.
  4. Unabsorbed depreciation.
  5. Unabsorbed capital expenditure on scientific research.
  6. Unabsorbed expenditure on family planning.

Need for Filing Loss Return

Income tax return in which loss is declared must be filed before the due date to carry forward the business loss. If a loss return is filed after the due date, the amount of business loss mentioned in the return cannot be carried forward.

Business Loss Must Be Adjusted Against Business Income

Business loss can be carried forward to the subsequent assessment year and set off only against business income of the subsequent year. Also, a business loss can be adjusted against business income from any other head of income except salary in the same assessment year. However, when the business loss is carried forward to the subsequent year, it can be adjusted only against business income.

Business May or May Not Be Continued

The business loss can be carried forward and set off in the subsequent year even if the business which incurred the loss is not carried on, in which the loss is sought to be carried forward and set off.

Business Loss Can Be Set Off Only By Assessee Who Incurred the Loss

Only the person who has incurred the loss can use the brought forward business losses for set off. Hence, a business loss can be set off only by the same assessee and cannot be transferred to another entity or person. However, the following are exceptions to the above condition:

Inheritance: If a business is carried on by one person and is acquired by another person through an inheritance, the loss can be carried forward by the successor. However, such a business loss can be carried forward by the successor only for the balance number of years for which the original assessee could have carried forward the loss.

Amalgamation: Business losses and unabsorbed depreciation of an amalgamating company can be set off against the income of the amalgamated company.

Conversion of Proprietorship or Partnership into a Company: In case of a reorganisation of a business whereby a proprietorship or a partnership firm is converted into a company, the accumulated business loss and the unabsorbed depreciation of the predecessor firm can be carried forward by the company.

Conversion of Company into LLP: If due to a business reorganisation, a private limited company or unlisted public company is succeeded by a LLP, then the business loss and unabsorbed depreciation of the predecessor company can be transferred to the LLP.

Demerger: Loss of the demerged company can be carried forward by the resulting company.

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