Setoff and Carry Forward of Losses

Insights from International Fresh Farms Products India Ltd vs. ITO

I. Introduction: The recent case of International Fresh Farms Products India Ltd vs. ITO [2023] 157 taxmann.com 127 (Chandigarh - Trib.) sheds light on the intricacies of claiming setoff and carrying forward losses under the Income Tax Act. The Assessee, in this instance, faced a challenge when the Assessing Officer (AO) denied the carry forward of business losses due to the belated filing of the return.

II. Background of the Case:

1. The assessee filed its return after the due date, declaring a total income of NIL and claiming to carry forward business losses under section 35AD.
2. The AO, during the processing of the return under section 143(1), denied the carry forward of business losses, citing the belated filing of the return.

III. Assessee's Contention:

1. The Assessee argued that the language in section 80 stipulates "carry forward and set off" and must be read conjointly. Therefore, the AO can invoke Section 80 only in the year when the assessee claims the setoff.
2. The matter was brought before the Chandigarh Tribunal to address this contention.

IV. Tribunal's Interpretation:

1. Section 73A(2) stipulates that any loss from a specified business under section 35AD not wholly set off shall be carried forward to the following assessment year.
2. The right to carry forward and set off losses is subject to the provisions of Section 80 of the Act.
3. Section 80 specifies that losses not determined in pursuance of a return filed as per section 139(3) shall not be carried forward and set off under section 73A(2).
4. Section 139(3) requires the filing of a return of income within the prescribed time for the carry forward of losses.

V. Tribunal's Decision:

1. The Tribunal distinguished two aspects: determination of loss by the AO and carry forward of losses to subsequent assessment years.
2. For the carry forward of loss, the Tribunal held that the AO must consider whether the return of income for the year of loss has been filed within the prescribed due date.
3. The original order denying carry forward was set aside, directing the AO to allow the carry forward of losses.

VI. Key Takeaways:

1. The case underscores the interplay between Sections 73A, 80, and 139(3) concerning the carry forward and setoff of losses.
2. It clarifies that the determination of loss and the consideration of filing due dates are distinct aspects.
3. Assessing Officers should judiciously examine the return for the subsequent year when an assessee seeks to set off brought forward losses.

VII. Conclusion: The International Fresh Farms Products India Ltd vs. ITO case serves as a guide for both taxpayers and tax professionals, emphasizing the importance of procedural compliance for claiming the carry forward and setoff of losses. It underscores the need for AO scrutiny in subsequent years, ensuring a fair and legal consideration of loss carry forward requests