Set Off and Carry Forward of Losses, Sec. 70 & Sec. 71, Income Tax Law and Practice Notes, B.Com 3rd Sem CBCS Pattern

Set Off and Carry Forward of Losses
Income Tax Law and Practice Notes
B.Com 3rd Sem CBCS Pattern

Q. Explain the provisions of the income tax Act, 1961 regarding carry forward and setoff of losses. 2014, 2015, 2016, 2017, 2018, 2019, 2021

Q. Explain the process of setting off and carry forward of losses in computing gross total income with exception. 2016

Q. What is unabsorbed depreciation? How it is set off?                                2016SN, 2017SN

Q. Write short notes on: Set off and carry forward of losses                        2016, 2017

Q. One Practical Problems expected: Computation of total income                         2014, 2015 (Two Years), 2016, 2017, 2018, 2019

(Illustrations given in Jain and Narang’s Book are commonly asked.)

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Meaning of Set off of Losses

After computing the income under five heads one by one and after taking the clubbing of income under Sec.60 to 64, we have to aggregate all these incomes to get Gross Total Income. But before arriving at the gross total income, we have to adjust losses either in the same head or against other heads under Sec.70 to 80. First we have to set off the losses within the same head and if it cannot be adjusted, against income of other heads. The adjustment of losses from one head against the income, profits or gains of any other head of income during the same tax year is called set-off of losses.

A) Set off of loss under the same head of income.(Sec.70: Inter-source set off): 

The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called inter-source adjustment, e.g. Adjustment of loss from business A against profit from business B.

Income of a person is computed under five heads. ‘Sources’ of income derived by an individual may be many but yet they could be classified under the same head. For instance, an individual may have a dual employment, yet the income would be classified under the head ‘Salaries’. However, given the mechanism of computing taxable salary income, it would be safe to say that an individual cannot incur losses under this head of income.Some of the inter-source adjustable incomes are given below:

a. Speculative Business Losses: An Assessee can set off the Losses incurred in speculation Business only against the profits of any other speculation Business. It is not permissible to set off speculative Loss against any other Business or Professional Income. An Assessee has an Opportunity to set off any other Business Loss with the profits of speculation Business.

b. Long Term Capital Losses: A long term Capital Loss can be set off only against the profits of any other long term capital gains, but short term capital loss can be set off against both short term and long term capital gains.

c. Loss from owning and maintaining race horses: This loss can be set off only against the income from owning and maintaining race horses.

d. Loss of specified Business under section 35AD: Specified Business loss can be set off only against profit from such specified business, but loss from other business can be set off against the profit of the specified business.

B) Set off Loss from one head against Income from another Head (Sec. 71: Inter head set off):

After making inter-source adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head   against income from other head, E.g., Loss under the head of house property to be adjusted against salary income.

A person may have various sources of income computed under different heads of income. Loss under one head of income is generally allowed to be set off against income under another head. Some of the inter-head adjustable incomes are given below:

a. House Property Losses: House Property Losses can be set off against profits from other heads. It can be set off against salary income, Business income, Income from capital gain, and income from other sources except casual income.

b. Non Speculative Business Losses: Non speculative Business Losses can be set off under any other head except income from salary. Means it can be set off from income from house property, income from capital gain and Income from other sources except casual income.

In the following cases losses cannot be set off under inter-head adjustments. Speculative Business Losses. Specified Business Losses. Capital Gain Losses.(Both short term capital loss and long term capital loss). Losses from owning and maintaining race Horses.

Meaning of Carry forward of losses: 

Many times it may happen that after making intra-head and inter-head adjustments, still the loss remains unadjusted. Where the losses are not fully adjusted against the income of the same tax year and such losses are transferred to the next tax year, this process of transferring un- adjustable losses to the next year is known as carry-forward of losses. Such unadjusted loss can be carried forward to next year for adjustment against subsequent year(s)’ income Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income. Carry forward of losses (other than loss from house property and unabsorbed depreciation) is permissible if the return of income for the year, in which loss is incurred, is filed in time. The late filing of return should not impact the status of carry forward of loss of previous years.

Rules regarding carry forward of losses of various heads are given below

1. Loss under head House Property: The loss under the head house property, let out or self-occupied, can be carried forward to the subsequent years subject to a limit of 8 assessment years. The loss is to be set off against the income from house property only. Loss under the head `house property’ may be set off against income under any other head upto a maximum of Rs.2,00,000 [Sec.71(3A)].

2. Business Loss: It can be carried forward for subsequent years subject to a limit of 8 assessment years and it is to be set off against profit from under head business only. In set off and carry forward of business losses the following important points are to be considered:

(a) The person who has incurred the loss, alone has the right to carry it forward. The successor except succession by inheritance (business passing from father to son) cannot claim to carry forward the loss incurred by his predecessor in business. However, where a company merges with another under the scheme of amalgamation, the past loss of the amalgamating company can be carried forward by the new company.

(b) The unabsorbed business loss of an industrial undertaking which was discontinued due to natural calamities shall be carried forward and set off against the profit of the reconstructed, re-established business upto a period of 8 assessment years as reckoned from the previous year in which the business is re-started.

(c) The business loss could be carried forward for 8 assessment years to be set off from income under the head ``profits and gains of business or profession.’’

(d) Loss from any asset held as stock-in-trade can be set off from any income from such asset even if it is taxable under the head other sources.’

(e) To carry forward business losses, continuity of same business is not necessary.

3. Speculation Loss: The loss of a speculation business of any assessment year is allowed to be set off only against the profits and gains of another speculation business in the same assessment year. But if speculation loss could not be set off from the income of another speculation business in the same assessment year, it is allowed to be carried forward to claim as a set off in the subsequent year, but only against the income of any speculation business. Such loss is also allowed to be carried forward for 4 assessment years immediately succeeding the assessment year for which the loss was first computed.

It may be observed that it is not necessary that the same speculation business must continue in the assessment year in which the loss is set off. It can be carried forward for succeeding 4 assessment years. But the loss is to be set off against the speculation profit only. A company whose principal business is that of trading in shares has been excluded from the purview of the explanation to Sec.73. Consequently, such activity shall not be regarded as speculation activity and any los arising there from shall be treated as normal business loss and not as speculation loss.

4. Unabsorbed Depreciation [Sec. 32(2)]: If there is a loss under business and profession and the reason for such loss is depreciation, then it is called unabsorbed deprecation and it shall be allowed to be carried forward. Unabsorbed depreciation allowance shall be added to the depreciation allowance for the following previous year or years and so on infinitely and deemed to be part of that allowance. The depreciation shall be carried forward even the business/profession to which is relate even of the business/profession not in existence. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation.

The assessee should set off brought forward losses in the following manner:

a)      First of all current year depreciation will be adjusted.

b)      Then brought forward business losses will be set off (speculative or non-speculative)

c)       Then unabsorbed depreciation will be set-off against business income.

d)      Unabsorbed depreciation can be carried forward for indefinite number of years.

e)      Unabsorbed depreciation can be set off from any head of income other than Salary and Capital Gain in any year.

5. Loss under the head “Capital Gain’: Where in respect of any assessment year, the net result of the computation under the head `Capital gains’ is a loss to the assessee, whether short-term or long-term such short-term and long-term capital losses shall be separately carried forward. Further, such carried forward short-term capital loss can be set off in the subsequent assessment year from income under the head capital gains whether short-term or long-term. But brought forward long-term capital loss shall be allowed to be set off only from long-term capital gain. Such capital losses can also be carried forward to a maximum of 8 assessment years, immediately succeeding the assessment year for which the loss was first computed.

6. Expenses incurred on maintenance of race horses: Loss from Owning and maintaining race horses: (Section 74A) An Assessee can carry forward these losses up to 4 years immediately succeeding the Assessment year in which the loss has incurred. It can be set off only against that income and an Assessee must file the Income Tax Return within due date prescribed under section 139(1). 

Master Chart of Set-off and Carry forward of Losses

Heads of Income

Set Off During the Same A/Y

Carry Forward  of Losses

Same Head

(Sect. 70)

Another Head

(Sec. 71)

Against which Head

Carry Forward

Years

Against which Head

1. Salary

Since No chances of Loss, set off and carry forward of losses is not applicable

2. House Property

YES

YES

Any Head Except Casual Income

YES

8

SAME HEAD

3. PGBF

YES

YES

(Including Speculative Business)

Any Income Excluding Salary Casual Income

YES

8

SAME HEAD

(Including Speculative Business)

4. Long Term Capital Gain(LTCG)

YES

NO

LTCG

YES

8

LTCG

5. Short Term Capital Gain(STCG)

YES

NO

LTCG/STCG

YES

8

LTCG/STCG

6. Income from other sources

YES

YES

ANY

Not Applicable (NA)

NA

NA

7. Speculative Loss

YES

NO

Speculative Gain

YES

4

Speculative Gain

8. Unabsorbed Depreciation

YES

YES

ANY INCOME

YES

NO Limit

ANY INCOME

9. Maintenance of race horses

YES

NO

Same Item

YES

4

Same Item

10. Specified Business U/S 35AD

YES

NO

Specific Business

YES

NO Limit

Any Specific Business

11. Loss in respect of Casual Income

Cannot be set off at all

12. Loss from exempted sourcese.g. agricultural

YES

NO

Agricultural income

Cannot Be Carry Forward

Note:

1.       No deduction for expenses can be claimed against casual income

2.       For any loss to be carried forward and set-off against the income of a subsequent year the return of such loss must be filed under sec. 139. If no return is file for the year in which the loss was incurred, the right to carry forward the loss is lost.

3.       Order in which current and brought forward losses are to be adjusted:

a)      Current depreciation

b)      Capital expenditure on scientific research

c)       Current loss of another business

d)      Brought forward losses of earlier years (Oldest loss can be adjusted first)

e)      Brought forward unabsorbed depreciation

f)       Brought forward unabsorbed capital expenditure on scientific research.

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