Introduction
Section 72 of the Income Tax Act, 1961 deals with the carry forward and set off of losses in certain cases. This provision allows taxpayers to carry forward and set off their losses from a particular year against their income in subsequent years, thereby reducing their tax liability.
Types of losses eligible for carry forward under Section 72
Section 72 allows for the carry forward of the following types of losses:
- Loss from business or profession
- Speculation loss
- Short-term capital loss
- Long-term capital loss
Conditions for carry forward of losses under Section 72
In order to carry forward losses under Section 72, the following conditions must be met:
- The return of income for the year in which the loss was incurred must have been filed within the due date.
- The loss must have been determined in the return of income filed for that year.
- The loss must not have been incurred in a business or profession that has been discontinued.
- The loss must not have been incurred in a speculative transaction that has been discontinued.
- The taxpayer must continue to carry on the same business or profession for which the loss was incurred.
Set off of carried forward losses under Section 72
Section 72 also allows for the set off of carried forward losses against income in subsequent years. The following rules apply for set off of losses:
- The loss from the previous year can be set off against income from the same head in subsequent years.
- The loss from business or profession can be set off against income from any other head of income except income from salaries.
- The speculation loss can only be set off against speculation income in subsequent years.
- The short-term capital loss can be set off against both short-term and long-term capital gains in subsequent years.
- The long-term capital loss can be set off against long-term capital gains in subsequent years.
It is also important to note that the carry forward of losses under Section 72 is subject to certain time limits. For example, the loss from business or profession can be carried forward for a maximum of 8 assessment years, while the speculation loss can be carried forward for a maximum of 4 assessment years. It is therefore advisable for taxpayers to utilize their carried forward losses as soon as possible to avoid losing them.
Moreover, Section 72 also allows for the amalgamation or merger of companies and carry forward of their losses. In such cases, the losses of the amalgamating company can be carried forward and set off against the profits of the amalgamated company. However, there are certain conditions that need to be met for such carry forward and set off to take place.
It is also worth noting that the carry forward of losses under Section 72 is not available to individuals who opt for the new tax regime introduced in Budget 2020. Under the new tax regime, taxpayers are not allowed to claim deductions and exemptions, including carry forward of losses.
In addition to the above, Section 72 also allows for the carry forward and set off of losses in cases where there is a change in the constitution of the business. For example, if a partnership firm is converted into a limited liability partnership (LLP), the losses incurred by the partnership firm can be carried forward and set off against the profits of the LLP.
It is also important to note that the carry forward of losses under Section 72 is not automatic. Taxpayers need to claim the carry forward of losses in their tax returns filed for subsequent years. In case the taxpayer forgets to claim the carry forward of losses in a particular year, they can still do so within the prescribed time limit by filing a revised return.
Moreover, Section 72 also provides for the carry forward and set off of losses in cases of business reorganization such as amalgamation, demerger, or merger. In such cases, the losses of the amalgamating or demerged company can be carried forward and set off against the profits of the resulting company subject to certain conditions.
Finally, taxpayers should keep in mind that the carry forward and set off of losses under Section 72 is a complex process that requires careful planning and execution. It is advisable to consult a tax professional or chartered accountant to ensure that the carry forward and set off of losses are done in a manner that maximizes tax benefits.
Conclusion
Section 72 of the Income Tax Act provides relief to taxpayers who have suffered losses in a particular year by allowing them to carry forward and set off those losses in subsequent years. This provision helps in reducing the tax liability of the taxpayer and provides a cushion against future losses.
However, it is important for taxpayers to meet the conditions laid out in Section 72 in order to be able to carry forward their losses. Failing to meet these conditions can result in the loss being forfeited. Furthermore, taxpayers should also keep in mind the rules for set off of losses while filing their tax returns in subsequent years. They should ensure that the losses are set off against the appropriate head of income and in the correct order to maximize the benefit of carry forward of losses.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
- Can losses be carried forward if the taxpayer has not done the tax audit?
No, losses from business or profession can only be carried forward if the taxpayer has got the tax audit done under Section 44AB of the Income Tax Act.
2. Is there a limit on the amount of loss that can be carried forward under Section 72?
No, there is no limit on the amount of loss that can be carried forward under Section 72. However, the loss can only be set off against the income earned in subsequent years.
3. Can losses be carried forward and set off against income earned from any source outside India?
No, losses can only be carried forward and set off against income earned in India.
4. Can losses be carried forward in case of a business shutdown?
Yes, losses can be carried forward in case of a business shutdown. However, the losses can only be set off against the income earned in subsequent years from the same business or profession.
5. Can losses be carried forward if the taxpayer has not paid the taxes due for the relevant year?
No, losses can only be carried forward if the taxes due for the relevant year have been paid within the due date or within the extended due date.
6. Can losses be carried forward if the taxpayer has filed a belated return?
No, losses can only be carried forward if the taxpayer has filed a tax return within the due date or within the extended due date.
7. Can losses be carried forward and set off against income from a different business or profession?
No, losses can only be set off against the income earned from the same business or profession in subsequent years.
8. Can losses be carried forward and set off against long-term capital gains?
Yes, long-term capital losses can be carried forward and set off against long-term capital gains in subsequent years.
9. Can losses be carried forward and set off against short-term capital gains?
Yes, short-term capital losses can be carried forward and set off against both short-term and long-term capital gains in subsequent years.
10. Can losses be carried forward and set off in case of a change in the nature of business?
Yes, losses can be carried forward and set off in case of a change in the nature of business, provided that the new business falls under the same category as the old business. For example, a loss from a software development business can be carried forward and set off against income earned from a software consultancy business.
