INCOME TAX

Set off of losses of firms for the assessment year 1993-94--Interpretation of the new section 75 of the Income-tax Act, 1961.

Circular No. 703

Dated 18/4/1995

To

All Chief Commissioners of Income-tax.

All Directors-General of Income-tax.

Sir,

With effect from the assessment year 1993-94 a new procedure for taxation of firms has been introduced according to which the distinction between registered and unregistered firms has been done away with. Consequently the requirement of apportionment of losses among the partners for set off and carry forward has also been given up. In line with this procedure, section 75 provides, with effect from 1-4-1993, that if there are unabsorbed losses in the hands of the partners to whom such losses had been apportioned for the assessment years 1992-93 and earlier years, the same shall be brought back to the firm to be set off against the income of the firm subject to the condition that the partner continues to be a partner in the said firm and are to be carried forward for set off under sections 70, 71, 72, 73, 74 and 74A.

2. Doubts have been expressed in some quarters as to whether the unabsorbed business losses so brought back to the firm are available for set off against the income of the firm under all heads for the assessment year 1993-94. This doubt has arisen because, normally, under section 72, the business losses brought forward are permitted to be set off only against the income under the head "Profits and gains of business or profession", and, that too, only if the business in respect of which the losses were incurred continues to be carried on in the year of set off.

3. A plain reading of section 75 shows that the losses which remain unabsorbed in the hands of the partners "shall be allowed to be set off against the income of the firm subject to the condition that the partner continues in the said firm and to be carried forward for set off under sections 70, 71, 72, 73, 74 and 74A". The expressions "set off" and "carried forward and set off" have been used in conjunction with sections 70, 71, 72, etc., thereby implying that both set off and carry forward and set off, as envisaged in these sections, are permissible.

4. The Board has, therefore, decided that the set off envisaged under sections 70 and 71 may be allowed for the assessment year 1993-94 in the hands of the firm in respect of the unabsorbed losses brought back to the firm.

5. This may be brought to the notice of all Assessing Officers working in your region.

(Sd.) Pravin Kumar,

Under Secretary, ITA-II,

Central Board of Direct Taxes.