set off of unab dep and b/f of loss

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CA NITIN KHODE (Querist)
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13 November 2007 Dear All
Wish you a Very happy new year,

I have one query regarding to the set off of unabsorbed deprecitaion and carried forward of losses as per bookes of accounts. i want to know the order in which the loss will be set off and if any case study on this may refer

thanking you

CA Nitin Khode

CA. Ramesh P Choudhary

CA. Ramesh P Choudhary (Expert)
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13 November 2007 Business loss in a financial year can be set off against any source of income other than income from salary in the same financial year. If, at the end of the financial year, the income is not sufficient to absorb the business loss, then the balance business loss can be carried forward to the next year. In the next year, such carried-forward business loss can be set off only against business income (not necessarily from the same business in which the loss has been incurred). The business in which the loss was originally suffered may or may not continue to be carried on by the assessee in the year in which the brought-forward loss is sought to be set off.

However, if the carried-forward business loss is on account of unabsorbed depreciation, then it can be set off in subsequent years against any income, whether chargeable under the head ‘Profit and gain of business or profession’, or under any other head (except income under the head 'salaries').

Case law:
The Madras High Court, in the Rajarathinam Transport (P) Ltd vs CIT (1993 199 ITR 203 Madras) case, ruled that if unabsorbed depreciation was not determined for being carried forward and set off, it cannot be allowed to be set off in a subsequent assessment year. There should be a specific order from the assessing authority determining the depreciation not only for assessment, but also for its being carried forward from one assessment to another.

Dissenting from this view, the Punjab and Haryana High Court, in the recent CIT vs Haryana Hotels Ltd (276 ITR 521) case, pointed out that the unabsorbed depreciation of previous years formed part of the current year's depreciation and allowance for depreciation comes from the current year's income.

Unabsorbed depreciation is deemed in law to be part of current depreciation. It has to be added to the depreciation of current year and the aggregate unabsorbed and current year depreciation had to be deducted from the total income of the assessment year.

In respect of business losses of earlier years, the law requires notification by way of an assessment order to enable the assessee carry forward the unabsorbed business losses for being set off against the current year's income. There is no provision in the Act that makes it mandatory for the assessee to a file return for carry forward and set off of unabsorbed depreciation which is to be notified by the AO, as in the case of unabsorbed business loss.

There is a clear distinction in the law with regard to the set off and carry forward of unabsorbed depreciation and unabsorbed business loss.