Set off and Carry Forward of Losses under Income Tax 1961

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This article focuses on provisions of The Income Tax Act, 1961 and rules made there under relating to Set Off and Carry Forward of Losses.

Adjusting of income under one head against the loss under another head is called setoff. This is done to arrive at taxable /total income.

Various provisions are as follows:

Section 70: INTER SOURCE ADJUSTMENT (INTRA HEAD ADJUSTMENT)

SECTION 70 deals with the set off of loss from one source against income from another source under the same head of income, subject to following exceptions:-

  1. Long term capital loss can be set off only against long term capital gain.
  2. Loss of a speculation business can be set off against profits of speculation business
  3. Loss incurred in activity of owing and maintaining race horses can be set off against income of that activity only
  4. Loss from a source , income of which is exempt u/s sec10
  5. No loss can be set off against winning from lotteries

example:- loss of one self occupied property can be set off against income of let out property

SECTION 71:- INTER HEAD ADJUSTMENT

Where in respect of any assessment year, the net result of any head of income is a loss; the same can be set off against the income under any other heads for the assessment year, subject to following exceptions:

  1. Capital gains loss cannot be set off against income under any other head.
  2. Loss of a speculation business cannot be set off against any other income other than profits of speculation business
  3. Set off loss from house property shall be restricted to rs.200000 for any assessment year.

exapmle:- Losses in one business can be set off from profits in another business – CIT v/s Muthuram Chettiar (1962) 44 ITR 710(SC).

SECTION 71 B: LOSS UNDER HEAD ‘INCOME FROM HOUSE PROPERTY’

Loss under the head ‘income from house property’ can be carried forward and can be set off against income under the same head only.

Period for which carry forward shall be allowed: 8 assessment years immediately succeeding the assessment year in which such loss is first computed.

example:- loss from one sold out house can be set off against other income of let out house.

SECTION 72: CARRY FORWARD AND SET OFF OF BUSINESS LOSS OTHER THAN SPECULATION LOSS

Loss under the head ‘profits and gains of business or profession’ (OTHER THAN SPECULATION LOSS) can be carried forward and set off against ‘business profit’. For this purpose business profit includes profits derived from a business activity but assessable under the heads other than ‘profits and gains of business or profession’

Period for which carry forward shall be allowed: 8 assessment years immediately succeeding the assessment year in which such loss is first computed.

example:- loss of car business can be set off and carried forward against profits of computer business

SECTION 73:- : CARRY FORWARD AND SET OFF OF SPECULATION LOSS

Losses from speculative transaction/business can be carried forward & set off against income from speculative business only.

Period for which carry forward shall be allowed: 4 assessment years immediately succeeding the assessment year in which such loss is first computed.

example: If a speculator believes XYZ Company stock is overpriced, they may short the stock, wait for the price to fall, and make a profit. The loss incurred for the time being can be set off against such speculative activities only.

SECTION 73 A:- : CARRY FORWARD AND SET OFF OF SPECIFIED BUSINESS

Any loss, computed in respect of any specified business referred to in section 35 AD shall not be set off except against profits and gains, if any, of any other specified business.

Period for which carry forward shall be allowed: An infinite year till the loss is not set off.

example:-loss from laying and operating a cross-country natural gas pipeline network for distribution can be set off against such specified business only.

SECTION 74:- : CARRY FORWARD AND SET OFF OF CAPITAL LOSS

Losses under the head ‘capital gains’ can be carried forward and set off against income under the same head, subject to restriction that the loss on transfer of long term capital assets can be set off only against long term capital gain.

Period for which carry forward shall be allowed: 4 assessment years immediately succeeding the assessment year in which such loss is first computed.

example:-  Miss Seema purchases a building in January 2014 and sells it in January 2015, holding it for just a year, making it short term capital asset. On sell it was a short term capital loss which can be set off against long term capital gain, if any.

SECTION 74 A:- : CARRY FORWARD AND SET OFF FROM ACTIVITY OF OWING AND MAINTAINING RACE HORSES

Losses under the activity of owing and maintaining horses can be set off against profits of the same activity only.

Period for which carry forward shall be allowed: 4 assessment years immediately succeeding the assessment year in which such loss is first computed

Types of Losses Intra   Head Adjustment Inter Head Adjustment Carry Forwarded Brought Forward Losses to be Set Off against Time Limit to carry forward Man datory filing of return of income
Loss from House Property Allowed Allowed, upto Maximum of Rs. 2,00,000 from AY 2018-19 Allowed Income from House Property 8 Years No
Loss from Speculative Business Only against Speculative business income Not Allowed Allowed Income from Speculative Business 4 Years Yes
Loss from Specified Business Only against Specified business income Not Allowed Allowed Income from Specified Business Unlimited Yes
Other Business Losses Allowed Allowed, except from Salary Income Allowed Income from Normal Business Yes
Short Term Capital Loss Only against STCG & LTCG Not Allowed Allowed STCG & LTCG 8 Years Yes
Long Term Capital Loss Only against LTCG Not Allowed Allowed LTCG 8 Years Yes
Loss from Owing & Maintaining Race Horses Only against income from Owing & Maintaining Race Horses Not Allowed Allowed Income from Owing & Maintaining Race Horses 4 Years Yes
Other Loss under ‘Other Sources’ Allowed Allowed Not Allowed N/A N/A N/A
Loss from Salary Loss from Salary Not Possible

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