Set off and carry forward of losses from specified business.

114(1)

Any loss computed from a specified business carried on by the assessee, during any tax year, shall be set off only against profits and gains, if any, of any other specified business for the said tax year.

114(2)

The unabsorbed loss from the specified business for any tax year shall be carried forward to the subsequent tax year and shall be set off only against the profits and gains of any specified business, if any, computed for such subsequent tax year, and so on.

114(3)

In this section,––

• (a) “specified business” means any specified business referred to in section 46;
• (b) “unabsorbed loss from the specified business” means, any loss computed in respect of a specified business carried on by the assessee during the tax year, which has not been, or is not wholly, set off against profits and gains, if any, of another specified business under sub-section (1) for the said tax year.

Explanation

Section Summary:

This section (Section 114) governs how losses from "specified businesses" can be set off and carried forward. It restricts the set-off of losses from specified businesses only against profits from other specified businesses, both in the current year and in subsequent years. This is a special provision that applies to specific types of businesses defined under Section 46 of the Income Tax Act.

Key Changes:

1. Restricted Set-Off: Unlike general business losses, which can be set off against any other income (e.g., salary, house property, or other business income), losses from specified businesses can only be set off against profits from other specified businesses.
2. Carry Forward Rules: Unabsorbed losses from specified businesses can only be carried forward and set off against profits from specified businesses in future years. This is a narrower scope compared to general business losses, which can be carried forward and set off against any business income.

Practical Implications:

1. For Taxpayers with Specified Businesses: If you operate a specified business (as defined under Section 46), you cannot use losses from this business to reduce taxable income from other sources (e.g., salary, rental income, or other non-specified businesses). This could result in higher taxable income in the year the loss is incurred.
2. For Businesses with Multiple Specified Businesses: If you operate multiple specified businesses, you can set off losses from one specified business against profits from another specified business in the same year. Any remaining unabsorbed loss can be carried forward to future years but only to offset profits from specified businesses.
3. Impact on Tax Planning: Taxpayers need to carefully plan their income and losses, as the restricted set-off and carry-forward rules limit flexibility in managing taxable income.

Critical Concepts:

1. Specified Business: Refers to businesses listed under Section 46 of the Income Tax Act. These are typically infrastructure-related or socially beneficial businesses, such as those involved in building and operating highways, ports, or affordable housing projects.
2. Unabsorbed Loss: This is the portion of the loss from a specified business that remains after setting it off against profits from other specified businesses in the same year. This unabsorbed loss can only be carried forward to offset profits from specified businesses in future years.

Compliance Steps:

1. Identify Specified Businesses: Ensure that the business qualifies as a "specified business" under Section 46.
2. Separate Accounting: Maintain separate accounts for specified businesses to accurately compute profits and losses.
3. Set-Off in Current Year: Set off losses from one specified business against profits from other specified businesses in the same year.
4. Carry Forward Unabsorbed Losses: If losses cannot be fully set off in the current year, carry forward the unabsorbed loss to future years and set it off only against profits from specified businesses.
5. Documentation: Keep detailed records of losses and profits from specified businesses to support claims during tax assessments.

Example:

• Scenario: A taxpayer operates two specified businesses: Business A (highway construction) incurs a loss of ₹10 lakh, and Business B (port operations) earns a profit of ₹8 lakh in the same year.
• Application: The taxpayer can set off the ₹8 lakh profit from Business B against the ₹10 lakh loss from Business A. The remaining ₹2 lakh loss is unabsorbed and can be carried forward to the next year. In the next year, if the taxpayer earns a profit of ₹5 lakh from another specified business, the ₹2 lakh loss can be set off against this profit, reducing the taxable profit to ₹3 lakh.

This section ensures that losses from specified businesses are ring-fenced and can only be used to offset profits from similar types of businesses, both in the current year and in future years.