Submission of return for losses.

121

Irrespective of anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed under section 263(1), shall be carried forward and set off under section 111(1) and 111(2), or 112(1), or 113(2), or 114(2) or 115(1).

Explanation

Section Summary:

Section 121 of the new income tax law in India addresses the conditions under which losses incurred by taxpayers can be carried forward and set off against future income. Specifically, it mandates that losses cannot be carried forward unless they are determined based on a return filed under Section 263(1). This ensures that losses are properly documented and verified before being used to offset future taxable income.

Key Changes:

• New Requirement for Loss Carryforward: Previously, taxpayers could carry forward losses even if they were not explicitly determined in a return filed under Section 263(1). The new law now explicitly requires that losses must be determined through a return filed under Section 263(1) to be eligible for carryforward.
• Stricter Compliance: The amendment introduces stricter compliance measures to ensure that losses are properly reported and validated before being used for future set-offs.

Practical Implications:

• For Taxpayers: Taxpayers must ensure that their losses are accurately reported and determined in a return filed under Section 263(1). Failure to do so will result in the inability to carry forward those losses, which could lead to higher taxable income in future years.
• For Businesses: Businesses with significant losses need to be extra cautious in filing their returns correctly to preserve their ability to offset future profits with these losses.
• For Compliance Processes: Tax authorities will now have a clearer record of losses claimed by taxpayers, reducing disputes and ensuring better enforcement of tax laws.

Critical Concepts:

• Loss Carryforward: This refers to the ability to offset current-year losses against future taxable income, reducing the tax liability in subsequent years.
• Section 263(1): This section pertains to the filing of returns and the determination of losses. It ensures that losses are formally recognized by the tax authorities.
• Set Off Provisions (Sections 111, 112, 113, 114, 115): These sections govern how losses can be set off against different types of income (e.g., business income, capital gains).

Compliance Steps:

1. File Returns Timely: Ensure that all returns, especially those involving losses, are filed within the prescribed deadlines under Section 263(1).
2. Accurate Reporting: Clearly report and document losses in the return to ensure they are formally determined by the tax authorities.
3. Maintain Records: Keep detailed records of losses incurred, as these may be scrutinized during assessments.

Example:

• Scenario: A business incurs a loss of ₹10 lakh in FY 2023-24. To carry forward this loss and set it off against future profits, the business must file a return under Section 263(1) and have the loss formally determined by the tax authorities. If the return is not filed or the loss is not determined, the ₹10 lakh loss cannot be carried forward, and the business will lose the opportunity to reduce its future taxable income by this amount.

This section emphasizes the importance of proper documentation and compliance to preserve the benefits of loss carryforward provisions.