Set-off and Carry Forward of Losses:
Meaning of set-off & carry forward of losses
Set off of Loss:
Adjustment of Losses against Profits from Another Source/Head of Income in Same Assessment Year.
Carry Forward of Losses:
If Losses cannot be Set-off in Same Year due to Inadequacy of Eligible Profits, then such Losses are carried forward to Next Assessment Year for Adjustment against Eligible Profits of that year
This topic can be divided into 2 parts:
1.Set off of Loss in Same Year
A.Intra-Head/Inter-Source Adjustments (Set off within Same Head of Income)
B.Inter Head Adjustements (Set off against other Head of Income)
2.Carry Forward & Set off of Loss in Next Year.
INTRA HEAD/INTER SOURCE ADJUSTMENT (SECTION 70)
Loss from Any Source of Income can be set off (adjusted) against Income from any other source
under the SAME HEAD.
Examples:
1.Loss from one house property can be set off against the Income from another house property as both these sources of income fall under one head of income.
2.Loss from one business (textiles) can be set off against income from any other business (printing) in same year as both these sources of income fall under one head of income.
Exceptions to Intra Head/Inter Source adjustment:
In following cases, Loss from one source cannot be adjusted against Income from another source although both falls under Same head:
a.Speculative Business Loss CANNOT be set off from Normal Business Income (Non- Speculative Business Income)
Speculation Business Loss can be set off against Income of ANY other Speculation Business only.
b.Loss of Specified Business CANNOT be set off against Normal /Speculative Business Income.
Loss of Specified Business can be set off against Income of ANY Specified Business only.
c.Such Loss can be set-off only against Income from Activity of Owing & Maintaining Race Horses only.
d.Long Term Capital Loss can be set off against Long Term Capital Gain only & NOT even against Short Term Capital Gain.
However, Short Term Capital Loss can be set off against both Short Term Capital Gain & Long Term Capital Gain.
e.NO SET OFF against any Income. It is Taxable @ 30%.
Expenditure Incurred for Buying Lottery Ticket → Not Deductible.
f.Loss from Exempt Source cannot be set-off against Profits from Taxable Source of Income.
INTER HEAD ADJUSTMENT [SECTION 71]
Loss from one Head can be set off against Income from Another Head.
Example: Mr. X has loss from Business/Profession of Rs. 3,00,000 & Income from House Property of Rs. 5,00,000. In such case, Loss from business (One head) can be set off against Income from House Property (Another Head).
Exceptions to Inter head adjustment:
a.Loss under the head Capital Gains can be set off against Income under the head Capital Gains only.
Loss under the head ‘Capital Gains’ CANNOT be set-off against Income under Any other Head.
b.Loss under the head PGBP CAN be set off against Income from Any Head of Income Except Income from Salary.
c.Loss under the head ‘House Property’ can be set off against any Head upto Rs. 2 Lacs only.
Since Intra-Head Adjustment is NOT Permitted in the following cases & thus Inter-Head Adjustment is also not permitted:
a.Loss from Speculation Business;
b.Loss from Specified Business u/s 35AD;
c.Loss from Activity of owning & maintaining Race Horses;
d.Loss of Lottery, Crossword Puzzles, Card Games;
e.Loss from Exempt Source of Income.
CARRY FORWARD OF LOSSES:
If Loss cannot be set off either under Same Head or under other Heads of Income due to Absence of Eligible Income in Same AY, it shall be carried forward to the next year & Set off against Income from Same Head in next AYs subject to prescribed Time Limit.
Key points:
Once a Loss is carried forward, it can be set off only against Income from Same Head.
Loss from Lottery cannot be set off nor Carried Forward.
TREATMENT OF VARIOUS LOSSES
1.House Property (Section 71B)
Firstly, Loss from one House Property shall be adjusted against Income from
Another House Property.
If still there is Unabsorbed Loss, it shall be set-off against income from any other
head upto Rs. 2,00,000 only.
Remaining (Unabsorbed) Loss will be carried forward to Next Year.
Such bought forward Loss can be set-off against Income under the head ‘House Property’ only in next PY.
2.Normal Business Loss (Section 72)
Firstly, Normal business loss can be set off against income under the head ‘Profit and Gains from Business and Profession’.
If still there is unabsorbed Loss, it can be set off against Income under any other head Except “salaries”.
If still there is a loss, it can be carried forward to Next Year.
Such bought forward Loss can be set-off against ‘income under the head Profit and Gains from Business and Profession’ only in Next Previous Year.
Key points:
Unabsorbed Depreciation can be set off against ANY HEAD OF INCOME.
It is not necessary that Business whose Loss is being set off must be continued.
Business Losses can be set off only by the assessee who has incurred loss: Only the person who has incurred the loss is entitled to carried forward or set off the loss. Thus, successor of a business cannot carry forward or set off losses of his predecessor.
1.Specified Business Loss (Section 73A)
Specified business loss u/s 35AD can be set off only against income of any other specified business.
Unabsorbed loss will be carried forward to next AY & set off against income from any Specified Business.
Note: Loss from a specified business can be set-off against Profit of another specified
business u/s 73A even if other specified business is not eligible for deduction u/s 35AD.
2.Speculation Business Loss (Section 73)
Speculation Business Losses can be set off only against any other Speculation Business Income.
If there is no other Speculation Income, it can be carried forward to subsequent years & setoff only against income from any speculation business carried on by the assessee.
Note: It is not necessary that same speculation business must continue in AY in which Loss is to be set off.
3.Capital Loss
Short Term Capital Loss can be set off against both Short Term Capital Gain & Long Term Capital Gain.
Long Term Capital Loss can be set-off only against Long Term Capital Gain & not against Short Term Capital Gain.
Carry Forward:
a.Short Term Capital Loss: It can be set off against ANY Capital Gains.
b.Long Term Capital Loss: It can be set off ONLY against Long Term Capital Gain.
Capital Loss cannot be set off against Income under any other Head.
4.Owning & Maintaining Race Horses [Sec 74A]
Losses from Activity of owning & Maintaining Race Horses can be set off only against Income from Activity of owning & Maintaining race horses only.