Setting off of Losses attributable to Deductions

Setting off of Losses attributable to Deductions

Setting off of losses attributable to deductions: Prior to the Finance Act, 2018, sub-section (4) of section 57 and sub-section (5) of section 59A provided that where business loss included deductions allowed under sections 22, 23, 23A, 23B and 24 that had not been set off against income, the amount not set off shall be added to the deductions allowed under those sections in the following tax year, and so on until completely set off.

Through the Finance Act, 2018, sub-section (4) of section 57 and sub-section (5) of section 59A have been substituted and now the loss attributable to deductions allowed under sections 22, 23, 23A, 23B and 24 that has not been set off against income shall be set off against 50 percent of the person’s balance income from business after setting off the business loss under sub-section (1) of section 57.

However, the condition of set off against 50% shall not apply if the taxable income for the year is less than Rs.10 million. This is illustrated through the following examples:-

Example 1                                                                                   (in Rs.)

Tax Year 1

Sales                                                                                         50,000,000

Business deductions excluding depreciation/amortization        30,000,000

Deductions u/s 22, 23, 23A, 23B & 24                                     40,000,000

Loss for the year                                                                       (20,000,000)

Tax Year 2

Sales                                                                                         70,000,000

Total admissible deductions for the tax year 2                          40,000,000

Business income for the year                                                    30,000,000

Brought forward loss                                                                (20,000,000)

Loss set off against 50% of business income                            15,000,000

Taxable income after setting off losses                                     15,000,000

Balance loss to be carried forward to Tax Year 3                 (5,000,000)

Example 2

Tax Year 1

Sales                                                                                         50,000,000

Business deductions excluding depreciation/amortization        30,000,000

Deductions u/s 22, 23, 23A, 23B & 24                                     40,000,000

Loss for the year                                                                       (20,000,000)

Tax Year 2

Sales                                                                                         45,000,000

Total admissible deductions for the tax year 2                          40,000,000

Business income for the year                                                    5,000,000

Loss for Tax Year 1 shall be set off against 100% of business income as taxable income for the year is less than Rs.10 million.

Taxable income after setting off losses                                     (15,000,000)

Balance loss to be carried forward to Tax Year 3                 (15,000,000)

Example 3

Tax Year 1

Sales                                                                                         50,000,000

Business deductions excluding depreciation/amortization        80,000,000

Deductions u/s 22, 23, 23A, 23B & 24                                     0

Business loss for tax year 1                                                      (30,000,000)

Tax Year 2

Sales                                                                                         70,000,000

Business deductions excluding depreciation/amortization        20,000,000

Deductions u/s 22, 23, 23A, 23B & 24                                     80,000,000

Loss for the year                                                                       (30,000,000)

Tax Year 3

Sales                                                                                         90,000,000

Total admissible deductions                                                     40,000,000

Business income for the year                                                    50,000,000

Setting off business loss for tax year 1                                     (30,000,000)

Income from business                                                              20,000,000

50% of income from business                                                  10,000,000

Loss for year 2 set off                                                              10,000,000

Taxable income after setting off loss                                        10,000,000

Balance loss attributable to deductions u/s 22, 23, 23A, 23B 8z 24 to be carried forward to tax year 4 is (Rs. 20,000,000/-

Normal income tax shall be paid on 50% of income from business after setting off business loss i.e. normal income tax shall be paid on Rs. 10,000,000/-.

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