Brought-forward Losses in a Private Company: Belated Return, Section 79 and Unabsorbed Depreciation
Zenova Polymers Private Limited, a manufacturer at Surat, is a domestic company whose shares are held equally by two individuals, neither of whom is a relative of the other. For FY 2024-25 its business profit, before set-off of any brought-forward items, is ₹62,00,000. It has a long-term capital gain of ₹18,00,000 on sale of listed equity shares on which STT was paid, and income from other sources of ₹4,00,000. It has a brought-forward business loss of ₹40,00,000 relating to AY 2019-20. For AY 2019-20 the return, due on 31 October 2019, was actually filed on 30 November 2019. It also has unabsorbed depreciation of ₹25,00,000 relating to AY 2020-21. In July 2021 one shareholder sold her entire 50% holding to an unrelated investor; the business has since continued unchanged. The company wants to set off the AY 2019-20 loss against the capital gain and to set off the unabsorbed depreciation against all three heads. The return for FY 2024-25 will be filed within the due date under section 139(1).
1. Can the brought-forward business loss of ₹40,00,000 be carried forward to FY 2024-25 and set off against the long-term capital gain?
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Step 1 - the carry-forward condition
Section 72 permits carry-forward of a business loss only if the return for the loss year was furnished within the time allowed under section 139(1). Section 139(3) read with section 80 makes this a condition precedent for carry-forward.
The due date for a company required to get its accounts audited for AY 2019-20 was 31 October 2019. The return was filed on 30 November 2019, that is, as a belated return under section 139(4).
Result: the loss of ₹40,00,000 cannot be carried forward at all. It is not available for set-off in FY 2024-25 against any income. It is irrelevant that the return for FY 2024-25 will be timely - the condition attaches to the loss year.
Step 2 - the set-off argument fails independently
Even if the loss had been validly carried forward, section 72(1) permits set-off of a carried-forward business loss only against profits and gains of business or profession. It cannot be set off against a long-term capital gain under section 112A. The company's proposal to set the AY 2019-20 loss against the ₹18,00,000 capital gain is therefore doubly wrong: the loss has lapsed, and the head-wise restriction would bar the set-off in any case.
Note the distinction with same-year set-off: under section 71 a current-year business loss can be set against capital gains, but a carried-forward loss under section 72 cannot.
2. How is the unabsorbed depreciation of ₹25,00,000 to be dealt with, and does section 79 restrict it?
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Unabsorbed depreciation - section 32(2)
Unabsorbed depreciation is added to the depreciation allowance of the current year and is deemed to be part of that allowance. It may be set off against income under any head except salaries; there is no time limit for carry-forward; and the requirement of a timely return under section 139(1) does not apply to it. Section 80 applies to losses under sections 72 to 74A, not to unabsorbed depreciation.
Accordingly the ₹25,00,000 is allowable against the business profit of ₹62,00,000, reducing it to ₹37,00,000. Since it is set off against business income there is no need to carry it to the capital gain or other sources, but as a matter of law it could have been set against any head other than salary.
Section 79
Section 79 applies to a company in which the public are not substantially interested. Where 51% or more of the voting power is not beneficially held by the same persons on the last day of the previous year in which the loss was incurred and on the last day of the year in which set-off is claimed, the carried-forward business loss lapses.
Here only 50% of the shareholding changed. The 51% threshold is not crossed, so section 79 is not attracted. In any event section 79 restricts only carried-forward business losses, not unabsorbed depreciation; the October 2021 Supreme Court decision in the context of section 79 confirms that unabsorbed depreciation stands on a separate footing, and the statutory scheme itself keeps it outside section 79.
3. Compute the total income of Zenova Polymers Private Limited for AY 2025-26 on the basis of your conclusions.
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Computation of total income, AY 2025-26
| Head / item | ₹ |
|---|---|
| Profits and gains of business or profession (₹62,00,000 less unabsorbed depreciation ₹25,00,000) | 37,00,000 |
| Add: brought-forward business loss of AY 2019-20 - not allowable (belated return; also barred against capital gains under section 72) | Nil |
| Long-term capital gain on listed shares (section 112A) | 18,00,000 |
| Income from other sources | 4,00,000 |
| Total income | 59,00,000 |
Notes for the file
- The ₹1,25,000 threshold under section 112A is not a deduction from total income; it only fixes the portion of the LTCG that is taxed at 10%. The full ₹18,00,000 remains part of total income for the computation, and the ₹1,25,000 is excluded only while applying the rate.
- No deduction under Chapter VI-A has been considered; a domestic company may claim the section 80G deduction for eligible donations, which would reduce total income.
- Advance tax on the LTCG would have to be considered; since capital gains can arise without anticipation, interest under section 234C can be avoided only where the gain arises after the relevant instalment dates.
- The unabsorbed depreciation has been fully absorbed in FY 2024-25, so nothing is carried forward.