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Rules for Carry Forward of Losses

Question: Explain procedure of carry forward of losses under the provision of income tax ordinance 2001? How different losses can carry forward?
Rules for Carry Forward of Losses




Carry Forward of Losses:

Sometime a taxpayer sustains a loss and fails to set off the whole amount of loss against the income of the same year. It may be due insufficiency of income under the same source are any other source or amount of loss is so heavy that cannot be adjusted against the income of the same year in such cases the loss that has not be fully adjusted are carry forward to next years. Which will be set off against the income of coming years? This process is called is carry forward losses.

Losses which cannot be carry forward:

Losses from following source are dead losses, which mean these losses cannot be carry forward
  • Loss from income from property
  • Loss from income from other source

Losses which can be carry forward:

Losses from following source of income or heads of income can be carry forward under certain condition,
  • Carry forward of loss from business (section-57)
  • Carry forward of loss certain companies (section-57-A)
  • Carry forward of loss of banking companies (section-57-2A)
  • Carry forward of loss of speculation business (section-58-2)
  • Carry forward of loss capital loss (section-59)
  • Carry forward of loss AOP (section-93(2)
  • Carry forward of loss business exempt from tax
  • Carry forward of loss of industrial undertaking established in export processing zone.

Rules for carry forward of losses:

1. Carry forward of loss from business section 57:

According to section 57 if loss from business & profession is not fully set off against the income of same year. Such losses can be carry forward up to income of six coming years. It must be noted that losses from business & profession are adjustable against the income of business & profession only.
2. Carry forward of losses of banking companies:
After an amendment finance act 2002, now the banking companies can carry forward their Un-Adjustable losses for the period of 10 years provided that;
  • Loss is sustained between 1stjuly 1995 and 30 june 2001.
  • This extension period is approved by the central board of revenue
  • The banking company is fully owned by the federal govt as on june 1, 2002
3.  Loss from speculation business:
According to section 58(2) if loss is sustained by an assessee in speculation business and could not be fully set off against the same year income it can carry forward against  the speculation gains up to 6 coming years.
4. Carry forward of capital lasses-section-59:
As we know, capital losses are only adjustable against capital gains of the same year. If a person could not set off his capital losses against the capital gain of the year. He can carry forward his capital losses under following conditions,
  • Losses will be set off on first in first out basis.
  • Capital losses will be carrying forward for a period coming 6 years.
5. Carry forward of losses of AOP-section 93 (2)
Losses sustained by an association of person cannot be carrying forward by AOP itself. However un-adjusted losses are divided among the members in their profit sharing ratio and members can be carry forward such losses against their private income ut to 6 coming years.
6. Loss of certain companies-section 57-A
According to section 57-A, if loss is sustained by a merging company, which could not fully absorbed in the year of occurrence. Such losses can be carry forward by the amalgamated companies up to 6 years.
  • Undertaking established in export processing zone
According to clause (1) IV if any loss is sustained by any industrial undertaking, set up in export processing zone. It can be carried forward by undertaking without any time limit or until the same loss is set-off.
7. Loss of business exempt from tax-section-55(2)
Losses of business exempt from tax not eligible for carry forward but after an amendment in in finance act 2003, now business enjoying the exemption of tax can also carry forward their losses after the expiry of exemption period.
  1. Group taxation 59 AA
The concept of group taxation is introduced through finance act 2007, now the companies who are 100% owned by same group and are incorporated under company ordinance 1984 have option to enjoy group taxation.
If two or more companies are allowed group taxation. Loss sustain by the one company can be set off against the income of other company.
8. Carry forward of losses under group taxation:
                The holding company and its subsidiary can set off and carry forward losses of
Each other under group relief concept, introduced through finance act 2004 and 2007.
Conditions:
  • The list company should be registered in Pakistan
  • A company in (ading) group will not enjoy any this benefit
  • Listed company should hold 55 % of share capital of subsidiary
  • Non listed company should hold 75 % of share capital of subsidiary
  • Subsidiary company manages or owns an industrial undertaking
  • Subsidiary company should continue same business in 3 years
  • Holding company is public listed company or private limited company
  • Losses surrendered will be adjusted in the same year and in following 3 years
  • After the expiry of 3 years un-adjusted losses will be reverted back to subsidiary coming for carry forward.
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