Carry forward and set off of Specified Business loss

Tax planning is a crucial aspect for businesses, and understanding how to carry forward and set off losses can help optimize tax liability. Section 73A of the Income Tax Act, 1961, deals specifically with the treatment of losses incurred by specified businesses under Section 35AD. This blog explores the provisions of Section 73A and how businesses can effectively manage their losses.

What is a Specified Business under Section 35AD?

A specified business under Section 35AD includes capital-intensive sectors such as:

• Setting up and operating a cold chain facility

• Developing and building a hotel of two-star or above

• Warehousing facilities for storage of agricultural produce

• Operating a hospital with at least 100 beds

• Laying and operating a cross-country natural gas pipeline

• Other capital-intensive businesses notified by the government

Losses Can Only Be Set Off Against Specified Business Income

According to Section 73A(1), any loss incurred in respect of a specified business cannot be set off against income from other businesses or sources. It can only be adjusted against profits earned from another specified business.

Carry Forward of Specified Business Losses

If a business does not have sufficient profits from a specified business to set off its losses in the same assessment year, the losses can be carried forward to the next year, as per Section 73A(2). The conditions for carrying forward losses include:

• Losses can only be set off against profits from specified businesses in subsequent years.

• If losses cannot be fully set off in 1 year, they continue to be carried forward indefinitely.

Practical Implications for Businesses

1. Limited Adjustability: Since specified business losses cannot be adjusted against other incomes, businesses should carefully plan investments and revenue streams.

2. Long-Term Tax Benefits: Carrying forward losses indefinitely allows businesses to balance profitability fluctuations over time.

3. Separate Bookkeeping: It is advisable to maintain separate books for specified businesses to ensure proper computation and tax compliance.

Example Calculation

Scenario: A company operates a warehousing facility and incurs a loss of Rs. 10 lakh in AY 2024-25. It also operates a cold chain facility that generates Rs. 6 lakh in profits in the same year.

• The company can set off Rs. 6 lakh of losses against the cold chain facility profits.

• The remaining Rs. 4 lakh will be carried forward to AY 2025-26 and adjusted against future profits from any specified business.

Conclusion

Understanding the provisions of Section 73A can help businesses strategically manage their tax liabilities. Since losses from specified businesses can only be set off against similar businesses, proper tax planning and record-keeping are essential. Consulting a tax expert can further help in maximizing tax benefits under this section.