Set off & Carry Forward of Losses | Section 70 to 80 | Income Tax Case Laws

Table of Contents

1. Intra Head Set Off [Section 70]

2. Carry Forward and Set Off of Business Losses [Section 72]

3. Speculation Losses [Section 73]

4. Losses under Head Capital Gain [Section 74]

5. Intra Head Set Off [Section 70]

6. Carry Forward and Set Off of Business Losses [Section 72]

7. Speculation Losses [Section 73]

8. More on Losses under Head Capital Gain [Section 74]

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A Section-wise Case Book of Judgements of Supreme Court/High Courts/Income-tax Appellate Tribunal reported in 2021. It also includes Circulars & Notifications issued by the Dept. along with Words & Phrases taken from the reported case laws.

1. Intra Head Set Off [Section 70]

Section 70 would come into play only when capital gains have been computed in accordance with provisions contained in sections 45 to 55A.

Where assessee, NRI, sold a property and earned capital gain and also reported a long-term capital loss on sale of certain shares in company (VCAM) and Assessing Officer was of view that long-term capital loss on account of equity shares of company (VCAM) appeared to be prima facie fictitious and not entitled to be adjusted against any taxable income, since ownership of shares was transferred, consideration was paid and transaction was complete, benefit of this long-term capital loss set-off could not be denied to assessee.

 2. Carry Forward and Set Off of Business Losses [Section 72]

Where assessee claimed loss but Assessing Officer rejected books of account and made additions of positive income and Tribunal remitted matter, set-off of said loss returned by assessee in subsequent assessment years could not be declined only for reason that assessment for assessment year in dispute was in progress.

Assessing Officer cannot reject legitimate claim of set-off of unabsorbed losses even when assessee omits to claim same in return.

Where assessee claimed set-off of brought forward unabsorbed business loss and unabsorbed depreciation against income of relevant year, since assessee had not placed on record return of income of preceding years from which such business loss and unabsorbed depreciation were brought forward, issue was to be remanded.

Once a loss had been disclosed in income tax return, and such a loss had not been disturbed in scrutiny assessment proceedings, such a loss was to be treated as accepted, and quantification thereof could not have been disturbed.

Loss incurred by assessee in respect of its business unit claiming deduction under section 35AD could be set off against profit of assessee from another unit which was not eligible for deduction under said section.

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3. Speculation Losses [Section 73]

Where loss was incurred by assessee on account of error trades in respect of dealings of clients in share trading and not on own account and loss incurred in course of carrying on share broking business was in line with accepted market practices and no expenditure had been incurred by assessee in respect of error trades, Explanation to section 73 was not applicable.

Where assessee, engaged in business of stock broking, made certain mistakes while carrying out transactions of purchases and sales of securities on behalf of its clients which resulted in certain loss, since said transactions were not shown by assessee in financial statements, it was to be held that impugned loss did not pertain to assessee’s accounts rather it was related to that of its clients and, thus, provisions of Explanation to section 73 could not be applied.

4. Losses under Head Capital Gain [Section 74]

Loss from sale of long-term capital share on which security transaction tax has been paid should be allowed to be carried forward for set off even though income from such transfer of long-term capital asset is exempt under section 10(38).

Where Commissioner (Appeals) passed an order allowing assessee’s claim for LTCG arising from sale of government securities by applying cost inflation index and said issue had merged with order of Assessing Officer, said issue could not be re-examined by invoking section 263.

5. Intra Head Set Off [Section 70]

Section 70 would come into play only when capital gains have been computed in accordance with provisions contained in sections 45 to 55A [Assessment year 2015-16] [In favour of assessee]

Case Details: Naresh Jain v. Asstt. CIT [2020] 118 taxmann.com 519 (Jp. - Trib.)

Section 70 would come into play only when capital gains have been computed in accordance with provisions contained in sections 45 to 55A. If after working out deduction under section 54F, capital gain arising on sale of certain assets was not chargeable to capital gain, then loss arising to the assessee on sales of another assets could not be set off from gain of such assets.

Where assessee, NRI, sold a property and earned capital gain and also reported a long-term capital loss on sale of certain shares in company (VCAM) and Assessing Officer was of view that long-term capital loss on account of equity shares of company (VCAM) appeared to be prima facie fictitious and not entitled to be adjusted against any taxable income, since ownership of shares was transferred, consideration was paid and transaction was complete, benefit of this long-term capital loss set-off could not be denied to assessee [Assessment year 2010-11] [In favour of assessee]

Case Details: Michael E Desa v. ITO, IT [2021] 130 taxmann.com 314/191 ITD 691 (Mum. - Trib.)

The assessee, a NRI, sold a property and claimed the Long-Term Capital Gain (LTCG). He also reported a long-term capital loss on sale of certain shares in company (VCAM) and claimed set-off of the long-term capital loss incurred on sale of equity shares of VCAM against the long-term capital gains earned on sale of property. The Assessing Officer noted that the long-term capital loss appeared to be prima facie fictitious and was not entitled to be adjusted against any taxable income as purchase of shares was motivated for tax benefits to the assessee and rejected set-off of long-term capital loss.

Held that it was found that the ownership of shares was transferred on its net effective worth and book value, consideration was paid and transaction was complete and loss was real and the assessee might end up saving taxes but that was perfectly legitimate. The benefit of long-term capital loss could not be declined to the assessee, as long as transaction had been actually effected and the Assessing Officer was to be directed to allow the set-off of this long-term capital loss against the long-term capital gains.

6. Carry Forward and Set Off of Business Losses [Section 72]

Where assessee claimed loss but Assessing Officer rejected books of account and made additions of positive income and Tribunal remitted matter, set-off of said loss returned by assessee in subsequent assessment years could not be declined only for reason that assessment for assessment year in dispute was in progress [Assessment years 2016-17 and 2017-18] [In favour of assessee]

Case Details: Shelf Drilling Ron Tappmeyer Ltd. v. Dy. CIT (IT) [2021] 123 taxmann.com 49 (Mum. - Trib.)

Where the assessee claimed loss but the Assessing Officer rejected books of account and made additions of positive income and the Tribunal remitted matter, set off of said loss returned by the assessee in subsequent assessment years could not be declined only for reason that assessment for assessment year in dispute was in progress.

Assessing Officer cannot reject legitimate claim of set-off of unabsorbed losses even when assessee omits to claim same in return [Assessment years 2005-06 to 2008-09] [In favour of assessee]

Case Details: Mistral Solutions (P.) Ltd. v. Dy. CIT [2021] 123 taxmann.com 125/186 ITD 399 (Bang. - Trib.)

The assessee company filed its return and declared ‘Nil’ business income. Subsequently, the assessee filed a rectification application before the Assessing Officer seeking set-off of unabsorbed losses. The Assessing Officer held that fresh claim of deduction could not be considered since the assessee had omitted to file such with original return.

Held that in view of provision of section 72(1)(i) whether or not assessee has set-off losses in return of income, income tax authorities are required to give effect to section 72(1)(i) and set-off such losses. Thus, the Assessing Officer was to be directed to consider assessee’s claim of set-off of unabsorbed losses/depreciation against declared income.

Where assessee claimed set-off of brought forward unabsorbed business loss and unabsorbed depreciation against income of relevant year, since assessee had not placed on record return of income of preceding years from which such business loss and unabsorbed depreciation were brought forward, issue was to be remanded [Assessment year 2012-13] [Matter remanded]

Case Details: ACIT v. Parag Fans & Cooling System (P.) Ltd. [2021] 132 taxmann.com 44/86 ITR(Trib.) 598 (Indore)

Where the assessee claimed set off of brought forward unabsorbed business loss and unabsorbed depreciation against income of relevant year, since the assessee had not placed on record return of income of preceding years from which such business loss and unabsorbed depreciation were brought forward, issue was to be remanded.

Once a loss had been disclosed in income tax return, and such a loss had not been disturbed in scrutiny assessment proceedings, such a loss was to be treated as accepted, and quantification thereof could not have been disturbed [Assessment year 2012-13] [In favour of assessee]

Case Details: Cargo Service Centre India (P.) Ltd. v. Dy. CIT [2021] 132 taxmann.com 237 (Mum. - Trib.)

The assessee-company filed its return for relevant year with a loss of Rs. 19.06 crores which was subjected to scrutiny assessment whereby returned income was accepted. Since assessment order did not specifically mention about eligibility for carry forward of said loss, the assessee moved a rectification application which was decided by the Assessing Officer in assessee’s favour. The Commissioner revised rectification order under section 263 by holding that since Assessing Officer did not examine assessee’s claim for carry forward of loss in sufficient detail, loss could not be carried forward.

Held that once a loss had been disclosed in income tax return, and such a loss had not been disturbed in scrutiny assessment proceedings, such a loss was to be treated as accepted, and quantification thereof could not have been disturbed. Therefore, revision of rectification order was to be quashed.

Loss incurred by assessee in respect of its business unit claiming deduction under section 35AD could be set off against profit of assessee from another unit which was not eligible for deduction under said section [Assessment years 2011-12 and 2012-13] [In favour of assessee]

Case Details: Sarovar Hotels (P.) Ltd. v. Dy. CIT [2021] 126 taxmann.com 177/188 ITD 498 (Mum. - Trib.)

Loss incurred by the assessee in respect of its business unit claiming deduction under section 35AD could be set-off against profit of the assessee from another unit which was not eligible for deduction under said section.

7. Speculation Losses [Section 73]

Where loss was incurred by assessee on account of error trades in respect of dealings of clients in share trading and not on own account and loss incurred in course of carrying on share broking business was in line with accepted market practices and no expenditure had been incurred by assessee in respect of error trades, Explanation to section 73 was not applicable [Assessment year 2003-04] [In favour of assessee]

Case Details: Dy. CIT v. UBS Securities India (P.) Ltd. [2021] 125 taxmann.com 254 (Mum. - Trib.)

The assessee was a share broker and had purchased and sold shares on behalf of its clients and loss had occurred on account of dealing errors or some mistake in carrying out instructions of client such as specific limit instructions of client were overlooked, orders cancelled by client were not entered into system or overlooked by dealer, etc. The assessee claimed that loss was incidental to share broking business and provisions of Explanation to section 73 were not applicable.

Held that since the assessee was not engaged in business of purchase/sale of shares of other companies and loss was incurred by the assessee on account of error trades in respect of dealings of clients fund and not on own account and loss was in line with accepted market practices, Explanation to section 73 was not applicable.

Where assessee, engaged in business of stock broking, made certain mistakes while carrying out transactions of purchases and sales of securities on behalf of its clients which resulted in certain loss, since said transactions were not shown by assessee in financial statements, it was to be held that impugned loss did not pertain to assessee’s accounts rather it was related to that of its clients and, thus, provisions of Explanation to section 73 could not be applied [Assessment year 2010-11] [In favour of assessee]

Case Details: Dy. CIT v. Edelweiss Financial Advisors Ltd. [2021] 124 taxmann.com 361/188 ITD 834 (Ahd. - Trib.)

The assessee-company was engaged in business of stock broking. During assessment proceedings, the assessee submitted that it had made certain mistakes while carrying out transactions of purchases and sales of securities on behalf of its clients which resulted in certain loss. As per the assessee, such loss should be allowed as deduction under section 28(1) as it did not occur in its own account and same should not be treated as speculative loss under Explanation to section 73. The Assessing Officer disagreed with contention of the assessee by observing that the assessee had not furnished details of mistake committed by it, such as clients in whose accounts transaction was entered.

Held that since there was no transaction shown by the assessee as purchase and sale of shares in financial statements, it was to be held that impugned loss incurred by the assessee did not pertain to its accounts rather it was related to accounts of its clients. Accordingly, provisions of Explanation to section 73 could not be applied.

8. More on Losses under Head Capital Gain [Section 74]

Loss from sale of long-term capital share on which security transaction tax has been paid should be allowed to be carried forward for set off even though income from such transfer of long-term capital asset is exempt under section 10(38) [Assessment year 2011-12] [In favour of assessee]

Case Details: Shiv Kumar Jatia v. ITO [2021] 127 taxmann.com 179/190 ITD 181 (Delhi - Trib.)

Loss from sale of long-term capital share on which security transaction tax has been paid should be allowed to be carried forward for set off even though income from such transfer of long-term capital asset is exempt under section 10(38).

Where Commissioner (Appeals) passed an order allowing assessee’s claim for LTCG arising from sale of government securities by applying cost inflation index and said issue had merged with order of Assessing Officer, said issue could not be re-examined by invoking section 263 [Assessment year 2014-15] [In favour of assessee]

Case Details: Peerless General Finance & Investment Company Ltd. v. Dy. CIT [2021] 132 taxmann.com 80/87 ITR (Trib.) 281 (Kol.)

During year, the assessee-company claimed long-term capital loss (LTCL) on sale of Government Securities by applying cost inflation index. The Assessing Officer disallowed same. However, the Commissioner (Appeals) allowed such claim of the assessee for LTCL. Subsequently, the Principal Commissioner passed a revisional order disallowing claim of the assessee towards LTCL and set aside order of the Assessing Officer as erroneous.

Held that since issue relating to the assessee’s claim for LTCL arising from sale of Government securities had already been considered and decided by the Commissioner (Appeals), assessment order had merged with appellate order on this issue and, thus, same could not be revised by invoking provisions of section 263.