icai – intensive workshop on direct taxes - … · property 72 carry forward and ... 5 icai –...

Set off and carry forward of losses and related issues

ICAI – Intensive Workshop on Direct Taxes

May 2016

www.pwc.com/in

CA. B.S.NagarajManager, Direct Tax

CA. Shamini .AAssistant Manager,Direct Tax

Strictly Privateand Confidential

1 Overview of Chapter VI 1

2 Is set off mandatory 13

3 Business loss 18

4 Set off in certain special cases 26

5 Unabsorbed Depreciation 29

6 Losses on amalgamation / demerger / business reorganization 35

7 Restriction on carry forward of losses 42

8 Carry forward of loss on succession of business 51

PageSection Overview

Table of Contents

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Overview of Chapter VI

1

ICAI – Intensive Workshop on Direct Taxes • Set off and carry forward of losses and related issues

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Introduction

Concept of set off and carry forward of losses

2ICAI – Intensive Workshop on Direct Taxes • Set off and carry forward of losses and related issues

Section 1 – Overview of Chapter VI

• It means adjustment of losses againstthe profits from another source insame or another head (subject to

exceptions as provided in the Act) inthe same Assessment year).

Set-off

• If losses cannot be set-off in thesame year due to inadequacy of

eligible profits, then such losses arecarried forward to the next

assessment years for adjustmentagainst the eligible profits of that

year.

Carry forward

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Snapshot of sections

Computation ofincome from a

source

Intra headadjustments

(section 70)

Inter headadjustments

(section 71)

Set off ofbrought forward

losses

Computation oftotal income /

loss to becarried forward

Flow of computation

Section Subject

70 Intra head adjustments

71 Inter head adjustments

71BCarry forward and set off of loss from houseproperty

72 Carry forward and set off of business losses

72A Amalgamation / Demerger / Reorganization

73 Speculative business

73A Losses of specified businesses

74 Capital loss

74A Loss from owning and maintaining horses

78 Change in constitution of firm

79Carry forward and set off of closely heldcompanies

80 Submission of return for losses




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Intra-head set off – Various sources of income under the same head



Income from Salary

Dual employment

Profits and gains frombusiness/profession

Speculative businessSpecified businessNon-speculative business

Income from HouseProperty

House 1 – Self occupiedHouse 2 – Let-out

Income from Capital gains

LTCGSTCG

Income from OtherSources

Interest incomeBusiness of owning andmaintaining race horsesCasual income

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Exceptions to Intra-head set off – Current year



Loss from speculation business cannot be set of against profit from a non speculation business.

Loss from business specified under section 35AD cannot be set off against any other income exceptincome from specified business

LTCL can only be set off against LTCG and cannot be set off against STCG.

Loss from the business of owning and maintaining race horses can only be set off against incomefrom same business

No loss can be set-off against casual income and it is fully taxable – Section 58(4)

No expenses can be claimed against casual income

Loss from an exempted source cannot be set off against taxable Income

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6

* Includes income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or fromgambling or betting of any form or nature.




Set off of current year losses –Head adjustment summary

Heads SalaryHouse

Property

Business / Profession Capital Gains Other Sources

NonSpeculative

35ADbusiness

SpeculativeLong

term

Short

term

Owning &

maintaining

race horses

Casual

Income*Others

HouseProperty

loss X

Speculativebiz loss

X X X X X X X X X

Loss from35AD biz

X X X X X X X X X

Nonspeculative

biz loss

X X

Long termcapital loss

X X X X X X X X X

Short termcapital loss

X X X X X X X X

Loss frombusiness of

owninghorse

X X X X X X X X X

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Set off of brought forward losses



Type of Loss brought forward Income of current year Years

• House property loss Income from house property 8 years

• Speculation loss Speculation profits 4 years

• Non speculation business loss:

o Loss from business specified u/s 35ADIncome from business specified u/s

35ADNo time limit

o Unabsorbed depreciation

o Scientific research

o Family planning expenditure

Any income except Income fromSalaries and casual income

No time limit

o Other business lossesAny business income - Speculative/non

speculative/35AD8 years

• Short term capital loss Short and long term gains 8 years

• Long term capital loss Long term capital gains 8 years

• Loss from activity of owning & maintainingrace horses

Income from such activity 4 years

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Setting off of STCL(taxed at lower rate) against STCG (taxed at higher rate)



Particulars Tax Rate Amount

STCG (Equity MF) 15% 75

STCG (Debt MF) 30% 200

STCL (Equity MF) - (50)

Options available for set-off:

Option 1: The STCL can be set off against the STCG ( Debt MF) – Beneficial to the assessee; or

Option 2: The STCL can be set off against the STCG (Equity MF).

Case laws allowing the issue in favor of the assessee

M/s. T.Rowe Price International Discovery Fund (ITAT Mum) (2013) (ITA 7627/2011)

First State Investment (Hong kong) Ltd. reported in 33 SOT 26 (ITAT Mum) (2009)

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Capital Loss – Section 74

Long term capital loss v. Gain on sale of depreciable asset

IssuePermissibility to set off long term capital loss against capital gains arising on sale of depreciable assetsdeemed as short term capital gain by virtue of deeming provision under section 50 of the Act.

Facts

The assessee sold certain depreciable assets which were held for more than 36 months.

The gain on such sale was shown as long term capital gain and was set off against the brought forward longterm capital loss.

Tribunal’s

decision

The deeming provision of Section 50(2) of the Act can be extended only up to the computation of depreciableassets.

The fiction created by the deeming provisions cannot be extended beyond the object for which it was enacted(i.e.) computation of capital gains on disposal of depreciable assets.

Manali Investments v. ACIT (Bom HC)(ITA No. 6466 / Mum. / 2008)

Department’s

contention

AO did not accept the claim of the assessee by treated it as short term capital gain and disallowed the set off oflosses from long term capital assets. CIT(A) also rejected the claim of the assessee and confirmed the order ofthe AO.

Tribunal held that the assessee is entitled to set off long termcapital loss against the gain on sale of depreciable assets.



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Capital Loss – Section 74

Set off of brought forward business loss against gain on sale of depreciable asset

Section 72 provides that where for any assessment year, if there is an unabsorbed business loss,

not being a loss sustained in a speculation business, such unabsorbed business is allowable for

being set off 'against the profits, if any, of that business or profession carried on by

him and assessable for that assessment year'.

Thus for setting off the income there is no requirement of the gains should be taxable under the

head 'Profits and gains of business or profession‘. As long as gains are 'of any, business or

profession carried on by the assessee and assessable to tax for that assessment year', the same can

be set off against business loss carried forward from earlier years.

Digital Electronics Ltd vs. ACIT, ITA No.1658 (Mum.) 2009 (ITAT)

Issue Whether gain on sale of depreciable assets can be adjusted against brought forward business losses?

Facts

The taxpayer claimed set off of b/f business losses against STCG on sale of depreciable assets.

The AO being of the view that as per section 72 b/f business losses can be set off only against

profits and gains of business or profession, issued SCN to the assessee.

In reply, the assessee contended that profit realized on sale of business assets, being business

income, unabsorbed business loss could be set off against the said profit.

Decision



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Set off of brought forward losses – Return filing compliance



Type of Loss brought forward

Whether return of income isrequired to be filed within thedue date mentioned u/s 139(1)

to carry forward the losses

• House property loss No

• Speculation loss Yes

• Non speculation business loss:

o Unabsorbed depreciation No

o Scientific research

o Family planning expenditureYes

o Loss from business specified u/s 35AD Yes*

o Other business losses Yes

• Short term capital loss Yes

• Long term capital loss Yes

• Loss from activity of owning & maintaining race horses Yes

*Amendment brought about in the Finance Bill 2016

CIRCULAR 9/2015 [F.NO.312/22/2015-OT], DATED 9-6-2015

Delay in filing claim for refund/ carry forward of losses may be condoned by Principle CIT/CCIT/CBDT on application beingmade, subject to criteria and guidelines prescribed

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Set off of brought forward losses


Order of set off against the current year business income –

• Current year expenditure on Scientific research 35(1) and family planning 36(1)(ix)

• Current year depreciation 32(1)

• Brought forward business loss 72(1)

• Unabsorbed family planning expenditure

• Unabsorbed Depreciation 32(2)

• Unabsorbed capital expenditure on Scientific research 35(4)

Order of set off for business losses*


Because this is thefirst charge on thereceipt in the P&Laccount

The Supreme Court in the case of CIT v. Mother India Refrigeration Industries (P.) Ltd. (1985) 155ITR 711 (SC) has taken a contrary view that UD should be given preference over unabsorbedbusiness losses

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Is set off mandatory

13


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Option to the assessee

Unabsorbed depreciation must have been carried forward without interruptionHiralal Jeramdas v. CIT (1965) 58 ITR 1 (Bom.)

The section does not permit the assessee to have only part of the loss to be set off against income from other heads and carry

forward the balance.

Such a principle would be contrary to accepted principles of accounting and will not reflect the correct income of the

assessee in any particular year.

Section 72 provides for carry forward of loss only when such loss cannot be set off against the income under any head.

There is no provision under the Act which gives option to the assessee to show the profit as income and carry forward the loss

from another source to the next year for set off.

The unabsorbed losses must enter the assessment of every following year for ascertaining whether they could be set off against

profits and gains of any business, profession or vocation.

It is only when it is found in each year that they could not be so absorbed then they are allowed to be carried forward to the

next year and so on.

Assess does not have option to defer the set offCIT v. Milling Trading Co. P Ltd. (1994) 76 Taxman 389 (Guj.)

Partial set off and partial carry forwardG. Atherton & Co. v. CIT (1989) Tax LR 13 (Cal.)


Section 2 – Is set off mandatory

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Option to the Assessing Officer

AO must allow set off even if it is not claimedCIT v. Mahalakshmi Sugar Mills Co. Ltd. (1986) 160 ITR 920 (SC)

Whether a loss can be carried forward to the subsequent year and set off against the profits and gains of business under

section 72 has to be determined by AO dealing with the assessment of subsequent year.

In other words, a decision recorded by the AO who computed the loss in the PY that the loss cannot be set off against the

income of the subsequent year is not binding on the assessee.

There is a duty cast on AO to apply the relevant provisions of the Act for the purpose of determining the true figure of the

assessee’s taxable income and the consequential tax liability.

Merely assessee has not claimed set off of losses does not relieve the AO from his duty to set off the losses.

Right to carry forward to be decided by AO in year of set -offCIT v. Manmohan Das (1966) 59 ITR 699 (SC)

It is understood from the above precedents that set off of losses is a mandatory exercise in computation ofincome. Neither the assesse nor the tax authorities have any option to defer the set off of losses unless thesame cannot be absorbed by the current year’s income.



Duty on AO to rectifyKanaka Films P Ltd v ITO (1989) 177 ITR 88 (Mad HC)

If c/fd is later allowed in revision or as a result of a reference and by that time assessment for the following years are

completed, the AO is duty bound to rectify the subsequent assessments by allowing proper set off.

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Set off of loss from exempt sources against taxable income

The concept of income includes loss will apply only when entire source is exempt or is not liable to

tax and not in the case where only one of the income falling within such source is treated

as exempt.

Section 10(38) excludes in expressed terms only the income arising from transfer of long-term capital

asset being equity share or equity fund which is chargeable to STT and not entire source of income

from capital gains arising from transfer of shares. It does not lead to exclusion of computation of

capital gain of long-term capital asset or short-term capital asset being shares. Accordingly, long-term

capital loss on sale of shares would be allowed to be set off against long-term capital gain on sale of land

in accordance with section 70(3).

Raptakos Brett & Co Ltd vs DCIT, (Mum ITAT) ( June 2015)

IssueWhether the long-term capital loss from sale of equity shares (STT paid) can be set off against long-term capital gain from sale of land.

Facts

The taxpayer, in its computation of income, had set off long-term capital loss on sale of shares and

mutual funds units against the long-term capital gains arising from sale of land.

The Assessing Officer held that the losses claimed could not be allowed to be set off since the income

from long-term capital gain on sale of shares and mutual funds which was exempt under section 10(38).

Decision



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Applicability of set-off to clubbed income

Where section 64 operates, profit / loss from business of spouse included in total income of

assessee should be treated as profit / loss of business carried on by him for carry forward and

set off of loss under section 72 of the Act.

Losses can be set off against income included under section 64CIT v. J.H. Gotla (1985) 156 ITR 323 (SC)

IssueWhether the clubbed income / loss can be set off against the income / loss of the person inwhose hands such income is clubbed.

Facts

X has brought forward losses of earlier years.

During the year, the assessee set of such losses against his income and also the income of his

spouse which was clubbed in his hands.

Decision

The provisions of set off and carry forward of losses also applies to clubbed income



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Business loss

18


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Business Loss – Section 72

Eligible undertaking under section 10A, 10AA, 10B and 10BA

CBDT Circular(File No. 279/Misc./M-116/2012-ITJ dated 16 July 2013)

Permissibility to set off the losses of undertaking not eligible to deduction undersection 10A / 10AA / 10B / 10BA (‘ineligible undertaking’) against the profits ofundertaking eligible for deduction under section 10A / 10AA / 10B / 10BA (‘eligibleundertaking’)

The issues of set off and carry forward of losses in relation to section 10A, 10AA,10B and 10BA of the Act.

The following income/losses would need to be aggregated:

• The income / loss from various sources (i.e.) eligible and ineligible units under thesame head (in accordance with section 70 of the Act); and

• The income from one head with the income / loss of another head (in accordancewith the provisions of section 71 of the Act).

Controversy

Issue

CBDTClarification

Resultant loss from eligible unit afteraggregation

Resultant income from eligible unitafter aggregation

Eligible for carry forward and set off inaccordance with section 72 of the Act

Eligible for deduction in accordance withChapter VI-A or section 10A, 10AA, 10B or10BA of the Act

The CBDTcircular wouldbe binding onthedepartment’spersonnel.

However, theyare not bindingon the assesseeand Courts.


Section 3 – Business loss

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IssueBusiness loss and unabsorbed depreciation of the same year or brought forward from earlier yearscould not be set off against the income of the unit eligible for tax holiday benefit under section10A/10B

Facts

The exemption u/s 10A of the Act was computed before set off of brought forward business loss andunabsorbed depreciation by the taxpayer.

The AO recomputed the section 10A benefit to adjust the b/fd business loss and unabsorbed depreciationof non-10A unit and the AO held that the taxpayer was not entitled to exemption u/s 10A of the Act.

Decision

It is clear that the intention of the legislature was to provide benefit of c/fd of depreciation and business

loss relating to any year of tax holiday period and set off against income of any year post tax holiday. This is

also supported by the Circular No. 7 of 2003 issued by the CBDT.

In order to give effect to the aforesaid intention, it is necessary that the normal computation of business

income and the depreciation as per the provisions of the Act should be made for each year of tax holiday

period. The amount of depreciation and business loss remaining unabsorbed at the end of tax holiday

period should be determined so that the same may be set off against the income post tax holiday period.

Since the income of 10A unit has to be excluded from the total income of the taxpayer, the

question of unabsorbed business loss/depreciation being set off against such profit and gains of the

undertaking would not arise.

CIT v. Yokogawa India Ltd. & Ors. ITA No. 78 of 2011 (Kar.)ACIT v. Karle International P Ltd ITA No. 381 / Bang / 2012



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Facts

The assessee set up a 100% EOU in AY 1988-89.

For want of profit, it did not claim 10B benefit in AY 1988-89. 10B exemption is claimed from AY1992-93.

In AY 1994-95, assessee computed profits of EOU without adjusting brought forward unabsorbeddepreciation of AY 1988-89.

It claimed 10B exemption for entire profits of EOU and adjusted brought forward unabsorbeddepreciation against other income

Decision

The intention of the Legislature is only to provide 100 per cent exemption for export income and not

for other income. The assessee, by dividing depreciation contrary to section 32, had virtually taken

exemption from payment of tax even for other business income

Special income were required to be computed as per provisions of section 29 to 43A which included

section 32(2) of the Act.

Therefore, one cannot exclude depreciation allowance which computing profits of undertaking.

Hence, the Karnataka High Court reversed the decision of Tribunal and held that brought forward

depreciation loss had to be adjusted against profits of EOU before computing 10B exemption.

The Supreme Court was of the opinion that Civil appeal – filed by the assessee, being devoid of merits

deserves to be dismissed and dismissed the appeal accordingly, ruling in favour of the Revenue.

Himatasingike Seide Ltd. v. CIT – Supreme Court (September 2013)



Precision Camshafts v ACIT (Pune Trib)(2016)

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Facts

The assessee was a company, which was a STP unit, comes under the purview of section 10A.

It incurred certain loss in its STP unit and claimed setting off of that loss against the 'incomefrom other sources‘ relying upon the CBDT Circular dated 16-7-2013.

The Assessing Officer disallowed the said claim of set off of assessee.

Decision

The benevolent Circulars issued by the CBDT are binding on the revenue authorities and having

regard to the undisputed position that the Circular dated 16-7-2013 (supra) issued by the CBDT

is beneficial to the assessee on the issue involved in the present case, relating to set off of the

loss of 10A unit claimed by the assessee against income from other sources, the effect of the said

Circular is required to be given, as the same is binding on the revenue authorities.

The order of the Commissioner (Appeals) confirming the disallowance made by the Assessing

Officer on account of the assessee's claim for setting off of 10A unit loss against 'income from

other sources' is set aside and matter was restored to the file of the Assessing Officer for

deciding the same afresh, in the light of CBDT Circular dated 16-7-2013.

Mindteck (India) Ltd.. v. Income-tax Officer (BANG. ITAT) (2014)



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Eligible undertaking under section 10A, 10AA, 10B and 10BA - Summary



Sectionamendment

2003

Kar HCdecision

2012

CBDT CircularJuly 2013

CurrentScenario:ContraryRulings

Section 10A(6) which restricted carry forward of losses of businesslosses and unabsorbed depreciation of eligible undertakings wasamended w.r.e.f 01 April 2001 to do away with the restrictions

Yokogawa : Allowed set off of losses of eligible units withineligible units, carry forward of losses of eligible and ineligibleunits to be set off after tax holiday period

Aggregation of CY losses against income of eligible/ineligibleunits and only net income eligible for 10A/ net loss eligible forcarry forward

Himatsingke : B/fd Loss of eligible unit cannotbe set off against IFOS but to be set off againstprofits of eligible units in subsequent years, andonly net income eligible for 10A deduction.Mindteck: Loss from eligible unit can be set offagainst IFOS.

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Eligible undertaking under section 80-IA of the Act

Facts

Chennai

ITAT,

Kar & Mad

HC

• If the initial AY is considered to be the year of commencement of business, the purpose of providing theoption would be defeated.

• Therefore held that the initial AY would be the year in which the deduction is first claimed by the taxpayer.

• Losses of past years (prior to ‘initial AY’) are not required to be notionally set off against the profits earned inthe first year of the claim for deduction.

Notional set off of initial years losses

Year 2 - Loss Year 4 - Loss Year 5 - ProfitYear 1 - Loss

Set off of losses of eligible units against non eligible units

Mumbai

Tribunal

The initial AY would be the year in which the eligible unit commences production and not year in whichdeduction is first claimed by the taxpayer.

Losses of eligible units can be set off against the other income.

However, despite the above set off, loss has to be aggregated and notionally set off against the future profitsof eligible unit.

IssueNotional set off of initial years losses against the income of eligible unit in the year in which 80-IA deduction is claimed.

Issue

Set off of loss from eligible unit against income of non eligible units and Notional set offof such losses already set off against the income of eligible unit in the year in which 80-IA deduction isclaimed.

Year 3 - Profit



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Year

Incomefrom

eligible unit(A)

Income fromnon eligible

unit (B)

Adjustmentof b/f losses

Grosstotal

income

80-IAdeduction

Totalincome

Loss to bec/f

Year 1 (4,000) 2,000 - - - - (2000)

Year 2 (3,000) 5,000 2,000 - - - -

Year 3* 2,000 3,000 - 5,000 2,000 3,000

Year 4 (1,000) 2,000 - 1,000 - 1,000

Year 5 1,000 2,500 - 3,500 - ** 3,500


Eligible undertaking under section 80-IA of the Act

* First year of 80-IA claim

** 80-IA deduction not available on account of notional set off of loss of Year 4 against income of Year 5



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Set off in certain special cases

26


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Set off of losses against undisclosed income


Section 4 – Set off in certain special cases

Section 115BBE Amendment: Benefit of set off of losses will not be available againstincome added back under section 68/69/69A/69B/69C/69D

In the Finance bill, 2016 it is proposed not to allow offsetting of losses against income charged to tax asunexplained credit/investments/money/expenditure.This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to theassessment year 2017-2018 and subsequent years

Decisions allowing set off – Undisclosedincome would form part of IFOS

• Chensing Ventures (291 ITR 258)(Mad HC) (2007)

• CIT v. Shilpa Dyeing & Printing Mills(P.) Ltd. [2013] 219 Taxman 279 (GujHC)

• K.R.Automobiles V ACIT (ITATAhm)(2014)

Decisions denying set off –Undisclosed income does not fall

under any head of income

• Kerala Sponge Iron Ltd. vs.CIT (2015) (Ker HC)

• Fakir Mohamed Haji Hasan v.CIT [2001] 247 ITR 290/[2002](Guj.)

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Income under section 115BBD of the Act

Section 115BBD(2) of the Act

Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be

allowed to the assessee under any provision of this Act in computing its income by way of dividends referred to in sub-section

(1).

Issue

Meaning of the term “allowance”. Whether the provisions intend to curtail the set off of losses and unabsorbed depreciation

against the dividend received from foreign company.

Possible view

• The term “allowance” includes current year depreciation and unabsorbed depreciation as depreciation is referred as an

allowance under section 32 of the Act.

• However, the term “expenditure or allowance” in non obstante clause u/s 115BBD(2) of the Act does not extend to include

business loss.

• Hence, a view is possible that unabsorbed depreciation cannot be set off against the income taxable u/s 115BBD of the Act.

But current year business losses can be set off against such income.

• Alternatively, where losses are set off against the subsequent year’s business income, it could lead to a tax shield of 30% as

against 15% in case the same is set off against dividend income.

• Hence, set off of losses against subsequent year’s income could be subjected to contention.


Finance Bill 2016 : Section 115BBDA : It is proposed that no deduction in respect of any expenditure or allowance orset off of loss shall be allowed to the in computing the income by way of dividends (exceeding INR 10 lakhs)

Section 4 – Set off in certain special cases

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Unabsorbed Depreciation

29


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Legislative evolution


Section 5 – Unabsorbed Depreciation

• Carryforward forindefiniteperiod

• Set offagainst anyhead ofincomepermitted

Till AY1996-97

• Carryforwardonly for 8assessment years

• Set off onlyagainstbusinessincome

From AY1997-98

to AY2001-02

• Carryforward forindefiniteperiod

• Set offagainst anyhead ofincomepermitted

From AY2002-03

to tilldate

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Change in law

Facts

Decision

Section 32(2) of the Act uses the present tense to refer to allowance to which effect ‘cannot be’ and ‘has not

been’ given.

If the intention of the legislature had been to allow such b/f unabsorbed depreciation of earlier years at par

with current depreciation for the year u/s 32(1), section 32(2) would have used past or past prefect tense and

not the present tense.

Unabsorbed depreciation of the earlier period is allowable under the new provision but has to be dealt with in

accordance with the old provision and is subject to the limitation of being eligible for set-off only

against business income and for 8 years.

DCIT v. Times Guarantee Ltd.(2010) 4 ITR 210 (Mum. ITAT)

AY 2001-02 AY 2002-03Till AY 1996-97

IssueWhether the unabsorbed depreciation relating to AY 1997-1998 to 1999-2000 could be set off againstnon business income?

AY 1997-98Till date

Unabsorbed depreciationcould be set off againstany head of income.

Unabsorbed depreciationcould be set off only againstany business income.

Unabsorbed depreciation could be setoff against any head of income(original position restored).



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Change in law

Decision

Second amendment – Unabsorbed Depreciation is allowed to be carried forward for an indefinite period. Any

Unabsorbed Depreciation available to a taxpayer, as at the beginning of tax year 2001-02, would become

part of current depreciation of tax year 2001-02.

If the legislative intent was to restrict set off of Unabsorbed Depreciation of tax year 1996-97 for eight

subsequent years only, even after the second amendment, the Legislature would have incorporated a specific

provision to that effect.

The purpose of the second amendment was to dispense with the restriction of eight years for carry forward

and set off of Unabsorbed Depreciation.

DCIT v. General Motors India P Ltd.TS-641-HC-2012 (Guj)

IssueWhether the unabsorbed depreciation relating to AY 1997-1998 to 1999-2000 could be set off againstnon business income?

In the absence of a specific restriction provided by the Legislature and further, having regard tothe clear language of the provision as applicable from tax year 2001-02, the Taxpayer is entitledto benefit of indefinite carry forward of Unabsorbed depreciation.



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Change in law – Set off of UD against business income only

ParticularsView 1

(As per TimesGuarantee case)

View 2(As per General

Motors case)

Brought forward UD

AY 1995-96 (20) (20)

AY 2000-01 (Limitation period) (40) (40)

AY 2003-04 (20) (20)

Computation of total income for AY 2005-06

Income from business 30 30

Set off of UD

AY 1995-96 (20)

AY 2000-01 (30) (10)

AY 2003-04 - -

Income from other sources 50 50

Set off of UD

AY 1995-96 (20)

AY 2000-01 (30)

AY 2003-04 (20) (20)

Taxable income after set off 10 -

Limitation on setoff of UD onlyagainst businessincome

No limitation on set offof UD againstparticular head.(Restoration oforiginal position)



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Change in law – Carry forward of UD limited to 8 years

ParticularsView 1

(As per TimesGuarantee case)

View 2(As per General

Motors case)

Brought forward UD

AY 1995-96 (20) (20)

AY 2000-01 (Limitation period) (40) (40)

AY 2003-04 (20) (20)

Computation of total income for AY 2013-14

Income from business 100 100

Set off of UD

AY 1995-96 (20) (20)

AY 2000-01 - (40)

AY 2003-04 (20) (20)

Taxable income after set off 60 20

Limitation tocarry forwardUD for 8 years

No time limit forcarry forward UD(Restoration oforiginal position)



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Losses on amalgamation / demerger/ business reorganization

35


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Carry forward of losses of amalgamating companies – Section 72A

Provisions of the section


Section 6 – Losses on amalgamation / demerger / business reorganization

Section 72A - Losses and unabsorbed depreciation of transferor companycan be carried forward by the transferee company

Available if Transferor company is

• Company owning an industrial undertaking, ship, hotel• Banking company• Public sector company or companies engaged in the business of

operation of aircraft (Amalgamation should be with a companyengaged in similar business)

Industrial undertaking

• Manufacture/processing of goods• Manufacture of computer software• Business of generation or distribution of electricity/power• Telecommunication services• Mining, Construction of ships, aircrafts or rail systems

PwCMay 2016


Conditions to be satisfied



Conditions vis-à-vis Amalgamating company

Engaged in business with accumulated lossesfor > = 3 Years

Held continuously as on the date ofamalgamation at least 3/4th of the book value offixed asset held by it for 2 years prior to the dateamalgamation

Conditions vis-à-vis Amalgamated company

Holds continuously for minimum 5 Years fromthe date of amalgamation , at least 3/4th of thebook value of fixed asset

Continues business of amalgamating companyfor at least 5 years from the date ofamalgamation

To achieve production of at least 50% of theinstalled capacity before the end of 4 years fromthe date of amalgamation and to maintain thesaid minimum level till the end of 5 years fromthe date of amalgamation

PwCMay 2016


Conditions to be satisfied not in aggregate

Issue

Conditions for carry forward and set off of accumulated loss inamalgamation are required to be complied in relation to eachamalgamating company and not in aggregate.

Facts

Amalgamation of Y P Ltd and Z P Ltd with X P Ltd.

X P Ltd carried forward only losses of Y P Ltd.

AO contends that X P Ltd does not comply with the provisions of section72A(2)(b)(i) of the Act (i.e.) sold assets acquired under amalgamation.

In computing the asset holding acquired under amalgamation, AO includeddisposal of assets acquired from Z P Ltd. also.

Decision

The requirement of 75% fixed asset holding acquired under the scheme of amalgamation for minimum period of 5 yearsshould be complied in relation to each amalgamating companies.

In the present case, X P Ltd sold only 10% of assets acquired from Y P Ltd and had rightly claimed set off of losses of Y P Ltdalone.

The order of AO including the disposal of assets acquired from Z P Ltd also and disallowing the set off of losses is notsustainable.

Bayers Material Science P Ltd. v. ACIT(ITA No. 6666 & 6667 / Mum. ) ( 2013)

Z P Ltd.(Amalgamating

company)

Y P Ltd.(Amalgamating

company)

X P Ltd.(Amalgamated

company)



PwCMay 2016


Set off of losses of cooperative societies

IssueWhether the amalgamated society could claim the set-off of losses of amalgamating co-operativesocieties against its profits?

Facts

Amalgamation of 4 cooperative societies into 1 by transfer of assets and liabilities.

The AO disallowed the claim of transfer and set off of accumulated losses against profits of amalgamatedsociety.

Decision

Carry forward of losses has been made only with regard to amalgamation of companies and later on similar

provisions were made with regard to banks, etc.

There was no such provision, which would permit the amalgamating co-operative society.

The societies and companies belong to different classes. Simply because both have a distinct legal

personality, it could not be said that both ought to have been given the same treatment.

The amalgamated society could not claim the set-off of losses of transferor societies.

Rajasthan R.S.S. & Ginning Mills Fed. Ltd. v. DCIT(2014) 45 taxmann.com (SC)

Department’s

contention

Registration of the amalgamating societies had been cancelled upon the amalgamation and were not inexistence at the time when the taxpayer was assessed.

As per the conjoint reading of Section 72 and 72A of the Act only ‘company’ could avail the benefit of set off oflosses.

The tax statute should be interpreted very strictly as there is no equity in tax matters.



PwCMay 2016


Meaning of industrial undertaking

IssueWhether amalgamation of hospitals constitutes industrial undertaking eligible for carry forward oflosses in the hands of amalgamated hospital?

Facts Amalgamation of hospital with another hospital.

Carry forward and set off of losses of amalgamating hospital by amalgamated hospital.

Decision

When the term 'industrial undertaking' has been well defined in the Act, which is the matter on hand, thecontentions of the respondent based on the judgments delivered prior to the introduction of suchamendment to the Income-tax Act and the definition rendered for the same term under the IndustrialDisputes Act, 1947, cannot be accepted.

Since admittedly, both the amalgamating and amalgamated enterprises are only 'hospitals', and whenhospitals are not brought into the folder of 'industrial undertakings' by Section 72A(7)(aa), neither theamalgamating and amalgamated enterprises, which are only hospitals can be termed as 'industrialundertakings', so as to make them eligible to claim the benefits under Section 72A of the Act.

ACIT v. Apollo Hospitals Enterprises 300 ITR 167 (Mad.) (2008)



PwCMay 2016


Determination of period for which amalgamating company engaged in business

IssueWhether the period of three years as prescribed u/s. 72A(2)(a)(i) of the Act has to be computed from theperiod of setting up of business or from the date of commencement of actual production?

Facts

A Ltd engaged in the business of manufacture of sugar since 1984.

It started work for establishment of power generation business in 2000 and commenced business from 2003.

A Ltd amalgamated with B Ltd w.e.f 1-3-2005 and amalgamated company claimed b/f losses ofamalgamating company for the relevant AY.

Decision

The phrase used in the section 72A(2)(a)(i) is “engaged in business” not “commencement of business”.

A Ltd engages itself in power generation business from the day when it gets involved in setting up of the

business.

Even otherwise, a perusal of sub-section (2) of Section 72A of the Act would go to show that it is the loss of

the amalgamating company as a whole, which is set-off or c/f, and not of a particular unit or division of that

amalgamating company. In that case it is evident that A Ltd is engaged in the business since 1984.

Set off of b/f losses allowed to the assessee.

CIT v. KBD Sugars & Distilleries Ltd.(2016) (Kar HC)

Department’s

contention

AO contended that condition prescribed u/s. 72A(2)(a)(i) of the Act was not complied with since A Ltdcommenced the business of power generation only from the year 2003.

Hence disallowed the set off brought forward losses related to the power generation business of theamalgamating company.



PwCMay 2016

Restriction on carry forward oflosses

42


PwCMay 2016

Restriction on carry forward of losses – Section 79

Deemed public company

Meredith Traders P Ltd v. ITO(ITA No. 3435 and 3436 Mum / 2010)

Z (P) LtdY (P) Ltd

X (P) Ltd

A Ltd

Facts

• X (P) Ltd had incurred certain business loss in Year 1.

• In Year 2, A Ltd., a public company, became a shareholder of X (P) Ltd,

holding more than 51% of shares as at end of Year 2.

• Losses incurred in Year 1 was not allowed to be carried forward for set off

against income of Year 2 on the grounds that there was change in

shareholding for more than 51%.

Decision

• In order to be categorized as “a company in which the public aresubstantially interested”, it is sine qua non that not only should it fulfill theconditions specified under the Act but also that it should not be a privatecompany as per the Companies Act.

• As definition of “public company” under the Companies Act, 1956, publiccompany includes “a private company which is a subsidiary of a companywhich is not a private company”.

• Once a company is found to be not a private company as per the CompaniesAct, it cannot be treated as a private company for purposes of Section 79read with Section 2(18) of the Act and hence it would be allowed to carryforward and set of the losses of the earlier years.

Year of loss

Z (P) LtdY (P) Ltd

X (P) Ltd

Year of set off

50% 50%

55%

45%

Transfer ofshares


Section 7 – Restriction on carry forward of losses

PwCMay 2016


Change in shareholding within the same shareholders

Sunanda Capital Services Ltd. v. JCIT(2009) 28 SOT 484 (Mum.)

Facts

• The shareholding of the Company in the year of loss was 40:60 for Y (P) Ltdand Z (P) Ltd. respectively.

• However, shareholding of the Company had subsequently changed to 75:25for Y (P) Ltd and Z (P) Ltd. respectively.

• AO has invoked section 79 on the grounds that change in shareholding led tochange in control and management.

Decision

• In the instant case, AO had himself affirmed the claim of the assessee thatthere was no change in the ownership of 51 per cent of the shareholders fromYear 1 to Year 2.

• Clause (a) of section 79 does not specify change in directorship or change inmanagement as a test.

• The Assessing Officer, instead of applying this test of seeing whether therewas a change in position of 51 per cent of shareholders, had gone on the basisof change in shareholding pattern and the change in management whichwere not the tests to be applied for coming to the conclusion whether clause(a) to section 79 applied to the facts and circumstances of the case.

• Hence, the assessee’s case fell under exception to clause (a) of section 79 andimpugned order passed by AO was to be set aside

Year 2

Z (P) LtdY (P) Ltd

X (P) Ltd

Year 1

40% 60%

Z (P) LtdY (P) Ltd

X (P) Ltd

75% 25%



PwCMay 2016


Beneficial ownership for intra group share transfers

Just Lifestyle P Ltd v. DCIT(ITA No. 2638 / Mum / 2012)

C (P) LtdA

X (P) Ltd

Facts

• The shareholding of the taxpayer had changed by more than 51 percent.

• C (P) Ltd. holding 80 percent shares had transferred their holding.

• Even after the change in shareholding, the same group continued to control

the shares of X (P) Ltd.

• The reference of share holders in Section 79 of the Act relates to the

beneficial holding in shares.

Decision

• D held controlling shares in C (P) Ltd. However, C (P) Ltd. being a separate

legal entity, it cannot be construed that the shareholding pattern of the

taxpayer has not changed in spite of transfer of shares from C (P) Ltd. to D

as the holding remains within the group.

• The provisions of Section 79 of the Act are clearly applicable to the facts of

the present case.

• Accordingly, the Tribunal denied carry forward of loss to the taxpayer.

Year of loss

Year of set off

10%

B

10% 80%

C (P) LtdA

X (P) Ltd

12.6%

B

0.4% 3.2%

D

Others

48.8%

35%

D

51%



PwCMay 2016



Yum Restaurants India P Ltd v. CIT(ITA No. 388 / Del / 2015)

Y (P) Ltd

Facts

• Z(P) Ltd is the ultimate holding company of Y (P) Ltd whose shares were

initially held by X (P) Ltd.

• Pursuant to restructuring within the group shares of Y (P) Ltd was

transferred to A (P) Ltd which is also a subsidiary of Z (P) Ltd.

• AO disallowed the claim of b/f loss for the relevant AY.

Decision

• X (P) Ltd and A (P) Ltd are distinct entities even though they are AEs of Z

(P) Ltd.

• There is nothing to show that there was any agreement or arrangement that

the beneficial owner of such shares would be the holding company, Z (P)

Ltd.

• The question of 'piercing the veil' at the instance of Y (P) Ltd does not arise.

• It was concluded that Y (P) Ltd cannot be permitted to set off the carry

forward accumulated business losses of the earlier years.

Year of loss

Year of set off

X(P)Ltd

100%



Z(P)Ltd

100%

A(P)Ltd

100%

Y (P) Ltd

A(P)Ltd

100%

Z(P)Ltd

100%

X(P)Ltd

100%

PwCMay 2016



AMCO Power Systems Ltd v. CIT (Kar HC) (2015)(ITA No. 1046 /Bang / 2008)

X Ltd

Facts

• The shareholding of the taxpayer had changed by more than 51 percent.

• Y Ltd. holding 100 percent shares had transferred their 45 percent holding

to Z Ltd (Subsidiary of Y Ltd) in the year 2 and 49 percent of holding to A

Ltd in the year 3.

• For year 3, the assessee filed its return claiming set off of losses of previous

years.

• The assessing officer denied the claim with a view that assessee was not

entitled to set-off of brought forward losses, as there was change in

beneficial shareholding of 51 per cent or more, as provided under section

79.

Decision

• Since the Y Ltd was having complete control over the Z Ltd, which is the

wholly owned subsidiary of Y Ltd, even though the shareholding of Y Ltd

may have reduced to 6 per cent in the year in question, yet by virtue of

being the holding company, owning 100 per cent shares of Z Ltd, the voting

power of Y Ltd cannot be said to have been reduced to less than 51 per cent,

because together, both the companies had the voting power of 51 per cent

which was controlled by Y Ltd.

• Accordingly, the court upheld the decision of tribunal allowing the

taxpayer the benefit of set off of brought forward loss to taxpayer.

Year 1

Year 2

Y Ltd

100%

Z Ltd

X Ltd

Y Ltd

6%45%

A Ltd

49%



Z Ltd100%

Y Ltd Z Ltd

55% 45%

100%

Year 3

X Ltd

PwCMay 2016


Applicability of Section 79 for unabsorbed depreciation

Set-off of unabsorbed depreciation allowed to assessee, held that Sec 79 is not applicable for

unabsorbed depreciation

Observed that unabsorbed depreciation is not a loss but allowances under section 32 of the Act,

therefore Sec 79 is inapplicable for set off and carry forward of unabsorbed depreciation.

Also relied on SC ruling in CIT vs Shri Subhulaxmi Mills Ltd wherein it was held that “in

applying section 79 of the Act, only the business loss should be taken into account. and not the

unabsorbed depreciation or unabsorbed development rebate”

Swiss Re Healthcare Services P. Ltd. vs. PCIT, [TS-175-ITAT-2016(Bang ITAT)]

Issue Whether section 79 of the Act applies to both business loss and unabsorbed depreciation ?

Facts

The shareholding of the taxpayer had changed by more than 51 percent during the relevant AY.

Taxpayer claimed unabsorbed depreciation which was denied by AO invoking the provisions of

Section 79.

Taxpayer contended the decision of AO on the grounds that Section 79 applies only to business

losses and not to unabsorbed depreciation.

Decision



PwCMay 2016


Interplay between section 79 and 72A – Case Study 1



XYZ Ltd ABC Ltd

XY Co- Loss INR50 crs

AB Co- Loss INR100 crs

100% 100%

Merger

XYZ Ltd ABC Ltd

AB Co

51% 49%

XY Co and AB Co has losses

Losses Available in AB Co post merger of XY Co with AB Co – INR 50 crs

PwCMay 2016


Interplay between section 79 and 72A – Case Study 2



XYZ Ltd ABC Ltd

XY Co- Loss INR50 crs

AB Co- Loss INR100 crs

100% 100%

Merger

XYZ Ltd ABC Ltd

XY Co

51% 49%

XY Co and AB Co has losses

Losses Available in XY Co post merger of AB Co with XY Co – INR 150 crs

PwCMay 2016

Carry forward of loss on successionof business

51


PwCMay 2016

Carry forward of loss on succession of business – Section 78

Carry forward and set off of losses in case of change in constitution of firm or onsuccession


Section 8 – Carry forward of loss on succession of business

In case of change inconstitution of firm

Where a change has occurred in the constitution of a firm, the firm cannot carriedforward and set off so much of the loss proportionate to the share of a retired ordeceased partner as exceeds his share of profits, if any, in the firm in respect of theprevious year.

In case of succession

Where any person carrying on any business or profession has been succeeded in suchcapacity by another person otherwise than by inheritance, the another person willnot be entitled to carried forward and set off against his income.

PwCMay 2016


Change in entity structure

Z(Son 2)

Y(Son 1)

X(Proprietary

concern)

YZ(Partnership

firm)

CIT v. Madhukant M Mehta[2001] 247 ITR 805 (SC)

Facts

• X was carrying on proprietary business of speculation in shares and

other commodities.

• He died leaving behind 2 son.

• The two heirs of X entered into a partnership wherein they agreed to

carry on the said business of speculation.

• The profits earned by partnership firm was set off against the losses

incurred by the deceased in his proprietary business.

Decision

• The partnership deed clearly evidenced the intention of the legal heirs to

succeed the business of X.

• The constituents of the firm's business were the same as those of the

business of X.

• The nature of the business was identical to the business which was being

carried on by X.

• The business name continued to be the same and was carried in the

same premises.



PwCMay 2016


Change in entity structure

XY & Co(Partnership

firm)

X(Partner)

Pramod Mittal v. CIT[2012] 205 Taxmann 444 (Del)

Facts

• X was a partner in XY & Co. who succeeded the business of XY & Co. by way of dissolution

of firm and take over of assets and liabilities.

• The profits earned by X from the succeeded business was set off against the prior year

losses incurred by the dissolved firm.

Decision

• As per section 170(1) of the Act, the partnership firm has to be assessed in respect of

profit and gains from the business till the date of dissolution. After that date, the sole

proprietor has to be assessed in respect of profits and losses.

• The income earned by X, as an individual, would include his share of loss as an individual

but not the losses suffered by the partnership firm.

• The losses suffered by XY & Co. cannot be set off from the income of X, in the absence of

any specific provision under the Act.

• Section 170(1) and 78(2) operates under different footing.

• Section 78(2) of the Act only provides that it is only the person who incurred or suffered

the loss who will be entitled to carry forward the same and set it off and no other person.

• An exception to this rule is the case of succession by inheritance

Dissolution offirm and take

over of business



Thank you

This publication has been prepared for general guidance on matters ofinterest only, and does not constitute professional advice. You should notact upon the information contained in this publication without obtainingspecific professional advice. No representation or warranty (express orimplied) is given as to the accuracy or completeness of the informationcontained in this publication, and, to the extent permitted by law, [insertlegal name of the PwC firm], its members, employees and agents do notaccept or assume any liability, responsibility or duty of care for anyconsequences of you or anyone else acting, or refraining to act, in relianceon the information contained in this publication or for any decision basedon it.

© 2016 PricewaterhouseCoopers Private Limited. All rights reserved. Inthis document, “PwC” refers to PWC & Co LLP which is a member firm ofPricewaterhouseCoopers International Limited, each member firm ofwhich is a separate legal entity.

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