Losses Chapter- 14
- FOREIGN LOSSES Foreign loss can be set off only against the
income under the same head of income only.
Unadjusted foreign loss can be
carry forward for adjustment
only against profit under same
head, upto six (6) succeeding
tax years following the year in
which loss incurred.Losses order of set off:
(^1) Firstly compute income chargeable to tax under (normal tax regime) each head of income even
where there is more than one source under the same head of income.
2 Secondly current year losses under normal tax regime (as stated above in first chart) shall be set off
against current year’s income but the loss under the head business income under normal tax regime
shall be set off last i.e. after set off of other heads of income (as stated above in first chart).
3 Thirdly set off the previous year’s business losses (excluding tax depreciation brought forward)
against current year’s business income (excluding tax depreciation for the year) under normal tax
regime, if any.
4 Finally set off the current year depreciation and previous year’s unabsorbed depreciation,
amortization and initial allowance against current year’s business income under normal tax regime, if
any.
Important aspects:
- The aforesaid Rules regarding set-off and carry forwarded of losses apply only to such incomes
which are taxable under Normal Tax Regime (NTR). Any income that falls under Final tax regime
(FTR) or separate block of income cannot be used for adjustment of losses under NTR. - The law does not permit any deduction while computing income under FTR or Separate block of
income. Hence, there cannot be loss under these streams of taxation. - Losses can be set-off only as provided above. Any loss that cannot be set off under the rules (e.g.
loss on disposal of personal assets, etc.) cannot be carried forward. [u/s 56(2)] - Where a person sustains losses under different heads of income, including ‘’Income from Business’’
the business loss shall be set off last, i.e. after setting off all other losses. [u/s 56(3)] - The depreciation allowance admissible under the Third Schedule shall be charged upto that portion
only which can be absorbed by the incomes. The general rules relating to set-off and carry forward of
losses shall not apply to unabsorbed depreciation. Amount of such depreciation shall not be taken as
a normal business loss rather, shall be treated separately. - If an income from a source is permanently exempt from tax, the loss, if any, from such sources
cannot be set-off or carried forward. - The Finance Act, 2003 has omitted the following sub section (2) of section 55;
“Where a person’s income from business is exempt from tax under this Ordinance as a result of a tax
concession, any loss sustained in the period of the exemption shall not be set off against the person’s
income chargeable to tax after the exemption expires.”
After the above omission the business loss sustained during the exempt period has, therefore, been
made adjustable against income of the post–exemption period of industrial undertakings. The
limitation period for carry forward of loss for six (6) years as contained in section 57 would continue to
be applicable.Depreciation:
Where the business loss includes depreciation and amortization that has not been set off against income,
the amount not set off shall be allowed as deductions in the following tax years until completely set off.
- Set off of losses (Section 56)
Except speculation loss and capital loss (including loss on securities u/s 37A) where a person
sustains a loss for any tax year under any other heads of income the person shall be entitled to set