Unit II:

Set off or Carry Forward of Losses (Sections 70-80)

Meaning and Rationale of set off and carry forward
of Losses
There are four different sources of income for a
business. These are income from business or
profession, income from house property, capital gains
and income from other sources. Within these heads also
there are sub-heads. Such as speculative business and
non-speculative business; house property one, two,
three and so on; short term and long term capital; and
there are different sub sources within the main source
of income from other sources. There may be profit or
loss within any main source or sub-source.
Set off the Losses
Set off of losses means adjusting the loss of one source or sub-source
with the profit of the other source or sub-source.
Intra-head adjustment of Loss
The loss may be within the source and can be adjusted within the
source itself. For example within the head of business and profession,
there are two heads speculative business and non-speculative business.
There may be loss in non-speculative business and this loss may be
adjusted with the profit of speculative business. This adjustment of loss
would be known as intra-head adjustment of loss
Inter-head adjustment of Loss
When intra head adjustment is not possible then there is a provision to
set off these losses against the profit available in any other head. This is
known as inter-head adjustment of losses.
Carry forward of Losses
When both intra-head and inter-head adjustment of losses is not
possible, then such losses are carried forward for the adjustment in next
year’s profit. These losses are continuously carried forward till the
entire loss is fully adjusted or the maximum time allowed for such
adjustment expires.
Three categories of set off and carry forward
of losses
The provisions relating to set off and carry
forward of business losses have been dealt in the
following three categories:
A. Inter-source adjustment of losses under the same head
of income also known as intra- head adjustment
B. Inter head adjustment in the same assessment year at
the time of aggregation of income of various heads
C. Carry forward of loss in the subsequent assessment
years to claim its set off if it is not set off.
Intra-head adjustment of losses (Section 70)
In the following cases loss from one source cannot be adjusted against
income from another source although it falls under the same head:
1. Loss from speculative business and non-speculative business under the
head of business or profession: As per section 73, any loss, in respect of a
speculation business carried on by an assessee, shall be set off only against
the income of another speculative business. It cannot be set off from non-
speculative business income. However, the loss arising from non-speculative
business can be set off against income from speculation business but vice
versa is not possible.
2. Loss from the activity of owning and maintaining of race horses: As per
section 74A, the loss incurred by the assessee, in the activity of owning and
maintaining race horses shall be set off against the income of such activity. It
cannot be set off against the income of any other source.
3. Loss on account of lotteries, card games, crossword or puzzles etc. cannot
be set off against the winnings from lotteries, card games, crossword or
puzzles etc.
4. Loss from a source which is exempt cannot be set off against income from a
taxable source.
5. Capital losses: short term capital loss can be set off against any capital gain
(long term or short term) but long term capital loss can be set off only against
long term capital gain.
Illustration 1.
R carries two businesses A and B. Business A is
manufacturing business while business B is speculative
business. State whether the loss can be set off in the
following two situations:
Business and Profession Situation I situation II

Manufacturing business profit ₹ 3,00,000 loss ₹ 15,00,000

Speculative business loss ₹ 1,40,000 profit ₹ 2,00,000

Solution: In situation I, set off is not possible as

speculative loss cannot be set off against the income of
non-speculative business. In situation II, set off the
losses is possible as the non-speculative losses can be
set off against the profit of speculative business.
Inter-head Adjustment of Losses (Section 71)
Important provisions for inter-head adjustment of losses are as given below:
1. Loss under the head Capital gain
Such capital loss whether short term or long term, shall not be allowed to
be set off against income under any other head. It will be carried forward.
2. Loss under Business and Profession
If in any assessment year there is a net loss under the head income from
business or profession, this loss cannot be set off against the income under
the head of salaries. However, such loss is allowed to be set off against the
income of any other head.
3. When intra-head adjustment is not permitted, the inter-head
adjustment of losses is also not permitted in the following cases:
• Loss from a speculation business
• Loss from the activity of owning and maintaining race horses
• Loss of lottery etc. cannot be set off against the winnings of
lotteries, crossword puzzles, card game etc.
• Loss from a source which is exempt.
Illustration 2.
State whether the loss can be set off in the following
two situations:
Capital Gain/Loss Situation I situation II
Short term capital gain/loss Loss ₹ 5,00,000 Gain ₹ 3,00,000
Long term capital gain/loss Gain ₹ 7,00,000 Loss ₹ 2,00,000

Solution:
In situation I, the short term capital loss can be set off
against the long term capital gain and net gain comes
₹ 2,00,000 after setting off the loss. In situation II, the
long term capital loss cannot be set off against short
term capital gain and this loss of ₹ 2,00,000 has to be
carried forward.
Carry Forward and Setting off Losses
If in any assessment the assessee is not able set his losses due to not
having income under any other head or the income was less than
loss, such loss can be carried forward to the following assessment
year for the purpose of setting off subject to the following
conditions:
1. Carry Forward and Setting off Business Losses
In the same assessment year, loss from a business can adjusted
against income from any other head of income, but when the loss is
to be carried forward to the subsequent year, it can be adjusted only
against business income.
2. Loss of any non speculative business/profession
Loss under the head “Profits and gains of business or profession”
can be carried forward only if the return of income/loss of the year
in which loss is incurred is furnished on or before the due date of
furnishing the return, as prescribed under section 139(1). Such loss
can be carried forward for eight years immediately succeeding the
year in which the loss is incurred.
Carry Forward and Setting off Losses (Cont..)
3. Loss of any speculative business/profession
Loss from speculative business can be carried forward only if the return of
income/loss of the year in which loss is incurred is furnished on or before
the due date of furnishing the return, as prescribed under section 139(1).
Such loss can be carried forward for four years immediately succeeding the
year in which the loss is incurred.
4. Loss from the business of owning and maintaining of race horses
Loss from the business of owning and maintaining race horses cannot be
set off against any income other than income from the business of owning
and maintaining race horses. Such loss can be carried forward only for a
period of 4 years. In the subsequent year(s) such loss can be adjusted only
against income from speculative business.
5. Carry forward and set off of house property loss
If loss under the head “Income from house property” cannot be fully
adjusted in the year in which such loss is incurred, then unadjusted loss can
be carried forward to next year. In the subsequent years such loss can be
adjusted only against Income from house property. Such loss can be carried
forward for eight years immediately succeeding the year in which the loss
is incurred.
Carry Forward and Setting off Losses (Cont..)
6. Carry forward and set off of capital loss
If loss under the head “Capital gains” incurred during a year cannot be adjusted in the same
year, then unadjusted capital loss can be carried forward to next year.
In the subsequent years, such loss can be adjusted only against income under the head
“Capital gains. However, long-term capital loss can be adjusted only against long-term capital
gains. Short-term capital loss can be adjusted against long-term capital gains as well as short-
term capital gains. Such loss can be carried forward for eight years immediately succeeding
the year in which the loss is incurred.
7. Provisions relating to set off of unabsorbed depreciation, unabsorbed capital
expenditure on scientific research and unabsorbed capital expenditure on promoting
family planning amongst the employees
Depreciation is first deducted from the income chargeable to tax under the head “Profits and
gains of business or profession”. If such depreciation could not be fully adjusted against such
income chargeable to tax in that previous year, the unabsorbed portion shall be added to the
amount of depreciation for the following year and shall be deemed to be the part of
depreciation for that year(similar treatment would be given to other allowances as mentioned
above). However, in the case of set off, following order of priority is to be followed:
1) First adjustments are to be made for current scientific research expenditure, family
planning expenditure and current depreciation.
2) Second adjustment is to be made for brought forward business loss.
3) Third adjustments are to be made for unabsorbed depreciation, unabsorbed capital
expenditure on scientific research or on family planning.
Illustration 3
From the following information submitted to you, compute the gross total
income of A for the assessment year 2019-20:

Income from salary 1,20,000

Income from house property 40,000
Business loss (-) 1,80,000
Short term capital loss (-) 60,000
Long term capital gain 1,40,000
Solution:
Income from salary 1,20,000
Income from house property 40,000
Business loss (-) 1,80,000
Capital gain: Long term capital gain 1,40,000
Less short term cap gain 60,000 80,000
Gross total income 1,20,000

Note: business loss cannot be set off against the income under the head of salary.
Therefore, the business loss of ₹ 1,80,000 will be adjusted to the extent of ₹
1,20,000 and the rest would be carried forward.
Illustration 4
Compute the taxable income in the following two situations:
Heads of Income Situation I Situation II
Income/Loss from manufacturing business Rs. 1,50,000 (1,00,000)
Income/Loss from speculative business Rs. (80,000) 3,50,000
Short term capital gain/loss (1,70,000) (1,70,000)
Agricultural Income Rs. (40,000) 60,000

Solution:
Heads of Income Situation I Situation II
Income/Loss from manufacturing business Rs. 1,50,000 (1,00,000)
Income/Loss from speculative business Not set off 3,50,000
Short term capital gain/loss Not set off Not set off
Agricultural Income Not set off Not set off
Total Income Rs 1,50,000 2,50,000
Set off & Carry Forward of Losses
-Some Numerical Exercises
1. From the following data you are required to
compute the total income of X Ltd. in a manner most
beneficial to the company for the current assessment
year:
Business Loss Rs. 50,00,000
Property Income 45,00,000
Income from other sources 1,00,000
Short term capital gain 3,00,000
Long term capital gain 10,00,000 13,00,000
Solution:
Business Loss Rs (50,00,000)
Property Income 45,00,000
Income from other sources 1,00,000
Capital Gain:
Short Term Capital Gain 3,00,000
Long Term Capital Gain 10,00,000 13,00,000
Total Income after Set Off Rs 9,00,000
2. X Ltd submits the following information relevant to the previous year You are
required to determine the gross total income after making intra-head and inter-head
adjustment of losses and properly showing the amounts to be carried forward.:
Income from house property :
House I 25,000
House II 90,000
Profits and gains from business and profession:
Business I 16,000
Business II (24,000)
Business III (speculative) (72,000)
Business IV (speculative) 45,000
Capital gains:
Short term capital gains (12,000)
Long term capital gains 10,800
Income from other sources:
Income from card games 45,000
Income from betting 52,000
Loss on maintenance of horse races (12,500)
Solution:
Income from house property: House I : ₹ 25,000
House II : ₹ 90,000 1,15,000
Profits and gains from business or profession:
Business I : ₹ 16,000
Business II : ₹ (24,000)
Business III (spec): ₹ (27,000)
Business IV (Spec): ₹ 45,000 10,000
Capital Gains:
Short term capital loss: ₹ (12,000)
Long term capital gain: ₹ 10,800
Carry forward ₹ (1,200)1 --
Income from other sources:
Income from card games -- 45,000
Income from betting -- 52,000
Carry Forward ₹ (12,500)2 --
Gross Total Income: 2,22,000
Note:
1. STCL is adjusted to the extent of ₹ 10,800 Rest amount of ₹ 1,200 is to be carried forward
2. Loss on maintenance of race horses is not allowed to be adjusted inter-head. It is adjusted intra-
head with the same activity.
3. An individual submits the following information relevant to the previous year. You are required
to compute the gross total income after setting off and carry forward of losses.

Income from salary (computed) Rs. 1,40,000

Income from house property:
House I 25,000
House II 90,000
Profits and gains from business and profession:
Business I 16,000
Business II (24,000)
Business III (speculative) (72,000)
Business IV (speculative) 45,000
Capital gains:
Short term capital loss (12,000)
Long term capital gains 10,800
Income from other sources:
Income from card games 45,000
Income from betting 52,000
Loss on maintenance of horse races (12,500)
Solution:
Income from salary (computed) Rs. 1,40,000
Income from house property:
House I : 25,000
House II: 90,000 1,15,000
Profits and gains from business and profession:
Business I: Rs 16,000
Business II : (24,000)
Business III (speculative): (27,000)
Business IV (speculative): 45,000 10,000
Capital gains:
Short term capital loss: Rs. (12,000)
Long term capital gains: 10,800
Carry forward: STCL Rs 1,200
STCL is adjusted to the extent of Rs 10,800. Remaining amount Rs 1,200 is to be
carried forward . ----
Income from other sources:
Income from card games 45,000
Income from betting 52,000
Loss on maintenance of horse races of Rs 12,500 is to be carried forward. ----
Gross Total Income Rs 3,62,000
4. B. Limited submits the following information of income from different
sources for the current assessment year. You are required to compute gross
total income after a proper adjustment of set off and carry forward of losses:
Income from house property (Rs.) 7,000
Income from interest of a firm 1,500
Profit from cloth business before depreciation 40,000
Income from speculation business 3,200
Long term capital gains 9,100
Dividends from UTI 2,000
Current year ‘s depreciation 2,000
Following items have been brought forward from previous year:
Loss from cloth business 10,000
Unabsorbed depreciation 7,500
Loss from speculation business 7,000
Short term capital loss 4,200
Long term capital loss 11,400
Solution:
Income from house property 7,000
Profit from cloth business before depreciation 40,000
Less: current year depreciation (2,000)
Less: previous year loss of cloth business (10,000)
Less: Brought Forward unabsorbed depreciation (7,500) 20,500
Income from speculation business 3,200
Less: brought forward spec loss of previous yearn (7,000)
Carry forward spec. business loss: 3,800 ---
Long term capital gains 9,100
Less bough forward LTCL (11,400)
Carry forward of LTCL: 2,300 ----
Carry forward of STCL: 4,200
Income from other sources:
Income from interest of a firm 1,500
Dividends from UTI 2,000 3,500
Gross Total Income (Rs) 31,000