Carry Forward Losses on Succession: Guide on Successor's Rights

Carrying forward loss is one of the significant benefits of the Income Tax Act to assessees. The taxpayer can carry forward the current financial year's losses and subtract them from the profits of succeeding financial years. The act prescribes whether a particular loss is eligible to be carried forward, the period until which it can be carried forward, and the heads of income against which a specific loss can be set off. In this article, we will understand whether a successor can carry forward loss in particular situations through an interesting case law.

Pramod Mittal v. CIT

The High Court of Delhi passed the judgment on 11-10-2012.

Facts of the Case

1. The assessee and his brother were partners in a firm. After the family settlement, the partnership was dissolved, and the assessee continued to be the sole proprietor of the entity.
2. The assessee set off losses of the erstwhile firm during the financial year.
3. The assessing officer contended that the assessee was involved in furnishing inaccurate particulars of income and, therefore, liable to a penalty under section 271(1)(c).

Section 78(2) of Income Tax Act

• Section 78(2) can be referred to as carrying forward losses in case of succession.
• In the case of a firm, the losses incurred by the preceding firm cannot be set off by the successor firm.
• The section also provides an exception that if the successor has inherited the property, they can offset the losses of the preceding firm.

Set-Off of Losses Allowed to Successor - Decision of the Court

• The court has decided in favor of the assessee. 
• The assessee cannot be denied the set-off option because the partnership firm is dissolved. 
• He is not liable to pay a penalty under section 271(1)(c) because he did not provide incorrect information in his returns by setting off losses of the erstwhile firm.
• The assessee succeeded as a sole proprietor through a family settlement. Therefore, the assessee can offset the loss considering the exception specified in section 78(2).

Final Word

The case law throws light on when losses of a firm can be carried forward by a successor. It is a simple and clear case law, passed on a section that is straight forward in nature, ensuring a seamless transition of losses of a firm in case of succession through inheritance.