Landmark Cases on Set-off and Carry Forward of Losses

Deduction under Section 10A or 10AA of the Income-tax Act is computed on the profits of the eligible unit without first setting off losses from other units or non-eligible units. Conversely, losses incurred by an eligible unit are allowed to be set off against the assessee's other taxable business profits.

If unabsorbed depreciation or losses from years prior to the initial assessment year for Section 80-IA claim have already been set off against other income, they cannot be notionally carried forward again to reduce the profits of the eligible unit for computing deduction under Section 80-IA. The notional carry forward provision under Section 80-IA(5) applies only to unabsorbed depreciation or losses that have not yet been absorbed.

The Supreme Court holds that for income tax purposes, the term 'income' includes 'loss,' allowing for the set-off of a spouse's or minor child's business losses when their income is clubbed with the assessee. This decision emphasizes interpreting tax statutes, especially benevolent provisions, by considering the legislative scheme over a strict literal construction.

Income deemed under sections 68, 69, 69A, 69B, or 69C of the Income-tax Act is a distinct category, separate from regular heads of income under Section 14, and losses from other heads, including business losses, cannot be set off against such deemed income.

The Assessing Officer must entertain and consider a claim for set-off or carry forward of losses, even if such a claim was not originally made in the assessee's initial return of income.

The deeming fiction in Section 50, which treats capital gains from depreciable assets as short-term, applies only for the purpose of computing capital gains under that section. For other provisions, such as set-off of losses under Section 74 or deductions under Section 54E/54EC, the asset's original character (long-term or short-term) is to be considered.

When computing deductions under Chapter VI-A, such as Section 80IA, losses from other business undertakings must be set off against the profits of the eligible undertaking before calculating the deduction. No deduction under Section 80IA is permissible if the overall 'Profits & Gains of Business or Profession' results in a loss.

The terms 'income' or 'profits and gains' are inclusive of losses, signifying that losses are 'minus income' to be factored into the computation of taxable income. Therefore, set-off and carry forward provisions for losses apply exclusively to taxable income or gains and cannot be pressed into service against non-taxable gains, such as those exempt under a DTAA or other specific provisions.

Deduction under Section 10A of the Income-tax Act is to be allowed only after setting off unabsorbed depreciation and brought forward business losses against the profits of the business.

For the purpose of computing profits eligible for a special deduction, such as under Section 80E or Section 10AA, losses from other independent divisions or ineligible businesses are not to be set off against the profits of the eligible unit. The profits of the eligible business must be computed independently.

Depreciation, including unabsorbed depreciation, should not be reduced from the profits of an undertaking eligible for deduction under Section 10A of the Income-tax Act, 1961, when computing the deduction amount.

Loss incurred by certain types of companies in trading derivatives is considered speculative loss under the Explanation to Section 73, as the value of stock derivatives depends on shares. Such speculative losses are ineligible for set-off or carry forward against business income.

When computing undisclosed income for a block period following a search, losses incurred during that block period must be allowed. An additional claim for the set-off of such losses can be raised before the appellate authorities.

The eligibility for an assessee to carry forward and set off losses, including capital losses, against future income is determined by the Assessing Officer in the year the set-off is claimed, not in the year the loss was incurred.

An additional claim for set-off of losses can be raised by the assessee before the appellate authorities during the appeal proceedings.

Losses incurred for the period prior to a search must be allowed during assessment proceedings, even if not claimed in the original return of income or a return filed in response to notices under sections 148 or 153A, particularly when the quantification of such losses was delayed due to the late availability of relevant information.

Excess application or expenditure of income for a charitable purpose can be carried forward for set-off against income in subsequent years.

Section 79, which prohibits carrying forward losses when there is a change in shareholding, does not apply if the beneficial shareholders remain the same, even after amalgamation or merger.

There is no bar under the Income Tax Act to setting off losses against deemed income under sections 68 to 69.