In case of business losses, it is important to file the return by the deadline. Apart from the advantage of the opportunity to file a revised return, it helps in securing a carryforward and set-off. This results in a lower tax burden in coming years
Incurring Losses, though unpleasant, can help you save taxes in future. The current tax laws allow losses incurred by a taxpayer to be carried forward and adjusted from income earned in the succeeding years. In tax lingo, this is called carrying forward and setting off losses .
The law, however, mandates that certain losses can be carrried forward and set off only if the return of income is filed within the prescribed time frame.
For individuals not subject to an audit, the due date for filing the I-t return is July 31 while others need to file their returns by September 31. A return filed after the due date is seen as belated. Not filing a return by the due date has the following consequences.
A return filed late cannot be revised. Also, as per Section 80, normal business loss, speculation business loss, short-term/long-term capital loss and loss incurred in the activity of owning and maintaining race horses can’t be carried forward and set off in future.
Therefore, taxpayers who have incurred losses of the above nature need to be vigilant to ensure that their returns are filed on or before the due date, which shall, in turn, ensure that the benefit of carrying forward losses is not unnecessarily lost. As per Section 80, only those losses that are of the nature mentioned above are denied a carryforward and setoff. All other allowances remain available to the taxpayer and are not hit by these restrictive provisions.
For instance, Section 80 does not apply to losses under ‘Income from House Property’ and such losses remain eligible for carryforward and set-off even if the return is filed after the due date. Similarly, all other allowances eligible for carrying forward and setting off in future years under their respective provisions (such as depreciation, development rebate and investment allowance) remain unaffected by Section 80 of the Act. Taxpayers filing belated returns remain eligible for carryforward and set-off in the future years.
While the provisions of Section 80 have withstood the test of time at various appellate forums, the provisions have been held by the courts as not applicable where a taxpayer, having erroneously claimed a lesser loss in the original return (filed by the due date), subsequently corrected the same by claiming a higher loss. It was held that the assessee was entitled to the benefit of the higher carried forward loss in subsequent years and not the loss reported in the original return. Similarly, where a return was filed with defects before the due date and the defects were removed subsequently, the cure of the defects rendered Section 80 inapplicable to the facts of the case.
Thus, it is advisable to file the I-t return within the stipulated time-frame in case of business losses. Apart from the advantage of the opportunity to file a revised return (in case a genuine claim is identified later), it helps in securing carryforward and set-off of losses. This results in a lower tax burden in the succeeding years. Still, if the deadline is missed, the CBDT can be approached with a request to condone the delay if there are sufficient mitigating facts and circumstances.
By Rakesh Nangia
The writer is managing partner, Nangia & Co. With inputs from Itesh Dodhi, manager, Nangia & Co