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Chapter 17- Set Off & Carry Forward of Losses

Clarification Added:
Page 156- Carry Backward of Losses
The readers should note that the carry backward is allowed only after obtaining permission of IRD. As
such, the carry backward must be performed as directed by IRD.
Question 1- Page 158

Check out Sec. 20 (2), refer page 155 and 156 of the book

Question 2- Page 158


We need to test the type of asset, Mr. Praveen is possessing. Elephant is a biological asset, but Mr.
Praveen is not conducting any business of elephant and raising elephants just for fun. As such, the
elephant is neither business asset (see definition of business asset), nor depreciable asset, nor trading
stock, nor non business chargeable asset (NBCA includes land, building or securities or interest in any
entity and no other). It means: gain or loss on disposal of elephant is beyond the scope of Income Tax
Act. As such, he cannot set off notional loss on sale of elephant with any other income.
Question 3- Page 158
As per Sec. 20 (8), tax loss sustained by any person during the tax holiday period (i.e. when no corporate
tax is levied) cannot be carried forward for set off in following Income Years, which means carry forward is
not allowed only when the person is enjoying tax holiday; not the concessional rate of corporate tax. As
such, the loss sustained by a company situated at underdeveloped area and paying tax at concessional
rate is allowed to be carried forward.
Question 4- Page 158
Note that Singa Road Ltd. is not a project carrying on Public Infrastructure projects that will ultimately be
handed over to Government of Nepal, but a construction company carrying on governments construction
work. As such, it is allowed for the carry forward of its business loss to be set off against investment
income or business income within next seven income years, not twelve income years.
(Had it been a public infrastructure project under BOT, the carry forward is allowed for next 12 years. The
distinguishing factor is person carrying on public infrastructure projects invest for construction of such
projects, generates revenue for certain years as agreed with Government and hand over the assets
including the infrastructure to GON after the expiry of specified years. The Government gets a project
without any cost, except that agreed in agreement)
On the basis of above, the taxable income for 2069/70 after set off of carried forward loss is:
Income for the Year
Less:
Loss Sustained for IY 62/63 (69/70 is 7th Year)
Loss sustained for IY 63/64
Loss sustained for IY 64/65
Loss sustained for IY 65/66
Loss sustained for IY 66/67
Loss sustained for IY 67/68
Loss sustained for IY 68/69

1,500,000
(500,000)
(600,000)
(200,000)
(150,000)
(100,000)
(75,000)
(10,000)

(1,635,000)

Chapter 17- Set Off & Carry Forward of Losses

Loss for the Year

(135,000)

Since the Income is just Rs. 1,500,000 and claimable carried forward loss is Rs. 1,635,000; the loss yet to
be carried forward is Rs. 135,000. Through Income of IY 2069/70, loss up to IY 65/66 is completely set off
and loss of Rs. 50,000 pertaining to IY 2066/67 is yet to be set off, which can be set off against income till
2073/74.
As the company sustained loss till 2068/69, which is last year for the recovery of unrelieved loss
pertaining to IY 2061/62, the loss of 61/62 cannot be set off against any business or investment income.
However, it can be carried forward to be set off against any gain on disposal of business asset, business
liability or non business asset of investment in the future period(s) u/s 36 of the Act.
Question 5- Page 158
As per Sec. 20 (4), in case a person carrying on construction contract (long term contract) through
international competitive bidding (ICB) sustains loss in the year of disposal of contract either
through completion or otherwise, as a result of loss sustained during the period or due to set off of
carried forward loss related to same contract, the person may carry back such losses to be set off
against the income of same contract after obtaining permission from IRD.
In the given case, as the loss calculated as per Sec. 26 during the year of completion of contract is Rs.
800,000 and the profit reported for Year I and Year II under the same contract as per Sec. 26 is Rs.
500,000 and Rs. 200,000 respectively; and the contract is obtained through ICB, ABC Ltd. may carry
back its loss of 3rd Year to be set off against the Income under the same contract, i.e. Rs. 800,000 of loss
can be set off against the taxable profit of Year I and Year II, however, the set off is allowed only to the
extent of available profit under the same contract, i.e. the loss of Year III to the extent of Rs. 700,000 can
only be carried back for set off. The companys intent to obtain IRDs permission will make it able to carry
back the loss as aforesaid. The remaining Rs. 100,000 can be carried forward to be set off as per Sec. 20
(1) and Sec. 20 (2).
Had it not an International bidding, one of the basic criteria, i.e. the contract to be obtained from
International competitive bidding would not be fulfilled; as such, the loss cannot be carried back as per
Sec. 20 (4). The loss of Rs. 800,000 may, however, be carried forward to be set off against business or
investment income to be generated in next seven income year(s).
Question 6- Page 158
No. As per Sec. 20 (1), in case a person has taxable income from any business during any income year,
the income can be applied for set off of loss as follows:
a. Loss from any other business of the same person during the same Income Year, or
b. Any unrelieved business loss of the same persons carried forward since last seven Income Years
(s).
The provision of carry forward is extended to 12 Years for entities involved in construction of
power houses, generation and transmission of electricity; public infrastructure projects that are
ultimately handed over to GON or persons carrying on Petroleum transactions under Petroleum
Act, 2040.
Through this provision, the Act has not envisioned the set off of investment loss from business income.
As such, investment loss of Rs. 50,000 of Mr. Shyam cannot be set off against business income of Rs.
120,000.

Chapter 17- Set Off & Carry Forward of Losses

Similarly, as Sec. 20 (3), foreign sourced losses can only be set off against foreign source income subject
to provisions of Sec. 20 (1) and Sec. 20 (2). As such, foreign source business loss of Rs. 24,000 cannot
be set off against Nepal Sourced business income of Rs. 200,000.