Section 73 of the Income Tax Act, 1961 is an important provision that deals with the treatment of losses incurred in speculation business. Speculation business refers to a business where there is a high risk of speculation in prices of commodities or stocks. This section lays down the provisions for carrying forward and set-off of losses incurred in speculation business.
Let’s dive deeper into the provisions of Section 73.
Carry Forward of Losses:
If a taxpayer incurs losses in speculation business in any financial year, the losses can be carried forward and set-off against the profits earned in the subsequent years, subject to certain conditions. The conditions for carry forward of losses are as follows:
- The taxpayer must have filed the return of income for the year in which the loss was incurred within the due date specified under Section 139(1) of the Income Tax Act.
- The loss can only be carried forward for a maximum of four assessment years immediately following the assessment year in which the loss was incurred.
- The loss can only be set-off against the profits earned in the subsequent years from speculation business.
Set-Off of Losses:
The losses incurred in speculation business can be set-off against the profits earned in the subsequent years from speculation business only. This means that losses from speculation business cannot be set-off against profits earned from any other business or income heads. However, losses from other businesses or income heads can be set-off against profits earned from speculation business.
If the taxpayer has profits from speculation business in any financial year, the loss brought forward from earlier years can be set-off against such profits.
Illustration:
Let’s understand the provisions of Section 73 with an example. Mr. A incurred a loss of Rs. 1,00,000 in speculation business in the financial year 2020-21. He filed his return of income within the due date specified under Section 139(1) of the Income Tax Act. In the subsequent financial year, 2021-22, Mr. A earned a profit of Rs. 1,50,000 from speculation business.
In this case, Mr. A can carry forward the loss of Rs. 1,00,000 to the subsequent financial years, up to a maximum of four assessment years. He can set-off this loss against the profit earned in the financial year 2021-22. Hence, the taxable income from speculation business for Mr. A in the financial year 2021-22 will be Rs. 50,000 (i.e., Rs. 1,50,000 – Rs. 1,00,000).
The provision of Section 73 is applicable to all taxpayers who are engaged in speculation business, irrespective of their status as individuals, HUFs, firms, or companies. Speculation business is defined under Section 43(5) of the Income Tax Act as a business where a transaction in shares, securities, or commodities has been carried out by the taxpayer with the intention of making a profit by way of difference in the prices of the commodities, securities or shares.
The provision of carry forward and set-off of losses under Section 73 is significant for taxpayers engaged in speculation business as it provides them with a cushion to absorb the losses incurred in a particular year. It also incentivizes taxpayers to continue with their business despite incurring losses in a particular year, as they can set-off these losses against future profits.
It is important to note that the losses incurred in speculation business can be carried forward only if the return of income for the year in which the loss was incurred has been filed within the due date. Late filing of the return of income will result in the loss not being eligible for carry forward. Hence, taxpayers engaged in speculation business must ensure that they file their income tax returns within the due date.
Moreover, taxpayers must maintain proper records and documentation to support the losses incurred in speculation business, as these can be scrutinized by the tax authorities during assessment proceedings. In case the taxpayer is unable to substantiate the losses incurred, the tax authorities may disallow the carry forward and set-off of losses.
In conclusion
Section 73 of the Income Tax Act provides a framework for taxpayers engaged in speculation business to carry forward and set-off the losses incurred in a particular year. Taxpayers must ensure compliance with the conditions laid down under this section to take advantage of this provision. Proper documentation and record-keeping are essential to substantiate the losses incurred and avoid any issues during assessment proceedings.
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)
Q. Who can claim the benefit of Section 73 of the Income Tax Act?
Any taxpayer engaged in speculation business can claim the benefit of Section 73.
Q. What is speculation business?
Speculation business refers to a business where a transaction in shares, securities, or commodities has been carried out by the taxpayer with the intention of making a profit by way of the difference in the prices of the commodities, securities, or shares.
Q. What is the time limit for carrying forward losses under Section 73?
The loss can only be carried forward for a maximum of four assessment years immediately following the assessment year in which the loss was incurred.
Q. Can the losses incurred in speculation business be set-off against profits from other businesses or income heads?
No, losses incurred in speculation business can only be set-off against profits earned from speculation business.
Q. What is the due date for filing the return of income for claiming the benefit of carry forward and set-off of losses under Section 73?
The return of income must be filed within the due date specified under Section 139(1) of the Income Tax Act.
Q. What documents should a taxpayer maintain to support the losses incurred in speculation business?
Taxpayers must maintain proper records and documentation, including purchase and sale bills, contract notes, bank statements, and ledger accounts, to support the losses incurred in speculation business.
Q. What happens if the return of income is filed after the due date for claiming the benefit of carry forward and set-off of losses under Section 73?
Late filing of the return of income will result in the loss not being eligible for carry forward. Hence, taxpayers engaged in speculation business must ensure that they file their income tax returns within the due date.
Q. Can a taxpayer claim the benefit of Section 73 for losses incurred in any financial year?
Yes, a taxpayer can claim the benefit of Section 73 for losses incurred in any financial year, provided the conditions laid down under this section are met.
