Setoff of business loss with gain on depreciable assets

[SUDHAKAR SIVARAMAN]

Dear friends,

I have query related to Income tax. My client is having loss carry forward to the extent of Rs.1crore as business loss and Rs.5 lac as Unabsorbed depreciation loss. Next year he sold land and building for Rs.6.5 crore. Out of which building sale value Rs.4.5 crore.

Now my question is whether carryover unabsorbed deprecation loss can be setoff against gain on sale of building, since building is depreciable asset. Similarly whether business loss carryover can be setoff against this gain on depreciable asset and long term capital gain. Pls advice

[YAGAY andSUN]

Great query — and an important one, especially with respect to set-off and carry forward rules under the Income Tax Act, 1961. Let’s break it down based on your facts:

🧾 Scenario Recap:

• Business Loss Carry Forward: ₹1 crore
• Unabsorbed Depreciation: ₹5 lakh
• Sale of Land & Building: ₹6.5 crore
  • Building component: ₹4.5 crore
• The building is a depreciable asset forming part of the block of assets.

📌 Capital Gain Tax Treatment:

1. Sale of Depreciable Asset (Building – ₹4.5 crore):
   • Under Section 50, the gain on sale of a depreciable asset is treated as Short-Term Capital Gain (STCG)even if held for more than 36 months.
   • So, gain on building = STCG under Section 50.
2. Sale of Land (₹2 crore):
   • Land is a non-depreciable asset, so its gain is Long-Term Capital Gain (LTCG) if held for more than 24 months.

✅ Set-Off Rules:

Let’s address the set-off possibilities now:

1. Unabsorbed Depreciation (₹5 lakh):

• Yes, this can be set off against any income, including capital gains — whether STCG or LTCG.
• So, it can be adjusted against gain from sale of building (STCG under Section 50) and gain on land (LTCG).

🟢 Unabsorbed Depreciation → Set-off against any head of income (except Salary).

2. Business Loss (₹1 crore):

• Business loss CANNOT be set off against capital gains.
• It can only be set off against business income.
• Hence, gain on sale of building (even though a depreciable business asset) under Section 50, being treated as capital gain, does NOT qualify as business income for the purpose of set-off.

🔴 Business Loss → Not allowed to set off against STCG or LTCG.

🧮 Summary in Table Form:

Type of Loss	Amount	Can be set off against STCG (Section 50)?	Can be set off against LTCG?	Remarks
Business Loss	₹1 crore	❌ No	❌ No	Only against business income
Unabsorbed Depreciation	₹5 lakh	✅ Yes	✅ Yes	Set off allowed against any income

✳️ Recommendation:

• You may carry forward business loss further if not set off in this year (up to 8 years from the year of loss).
• Ensure audit and timely filing of ITR conditions are met for carry forward to be valid.

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AI Summary

Tax Strategy: Unabsorbed Depreciation Allows Offset Against Capital Gains, But Business Loss Remains Limited to Business Income A taxpayer with Rs. 1 crore business loss and Rs. 5 lakh unabsorbed depreciation sought guidance on setoff against capital gains from selling land and building. Unabsorbed depreciation can be set off against both short-term and long-term capital gains. However, business loss cannot be set off against capital gains, even for depreciable assets. Business loss remains restricted to business income and can be carried forward for up to 8 years.