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Definition: Tax Loss Carry Back
A tax loss carry back is an accounting mechanism where if a company posts a loss, it can carry it to the previous year to reduce the taxes it paid in that year. Usually, a tax loss carry back is done if in some precious year the company pad huge amount of taxes, and can obtain some of the amount in the form of refunds.
When these decisions are made by companies it helps in looking at available options among previous years, where this benefit can be availed.
Usually, such an option is available for a period upto three year prior to posting the loss.
Amarchand Enterprises was an extremely profitable cloth manufacturer, and has posted profits in excess of Rs. 50 lakhs per year for five consecutive years. However, in its sixth year of operation, the business posted a gross loss of Rs. 6 lakhs due to significant investment losses. Amarchand applied for a tax loss carry back wherein they could reduce the taxes paid by them the years 3 to 5, because of the loss posted in the sixth year. Therefore it received a refund of the some of the amount it had paid in tax the previous year.