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Taxation (Part A)
Chapter - 5

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 INCOME TAX LAW

CONCEPT NOTES

CHAPTER 5

Aggregation of income, set-off and carry forward of losses

AGGREGATION OF INCOME

Certain amounts, though not actual income, are treated as income under sections 68, 69, 69A,
69B, 69C, and 69D. Chapter 1 details these cases. The Assessing Officer can ask for an
explanation, and if unsatisfactory or not provided, the amounts are deemed the assessee's
income and added to their total income.

CONCEPT OF SET-OFF AND CARRY FORWARD OF LOSSES

The Income-tax Act, 1961 allows set-off and carry forward of losses. Set-off involves adjusting
losses against profits from another income source in the same year. If there aren't enough
eligible profits, losses can be carried forward to the next year for adjustment. The Act specifies
the maximum period for carrying forward different types of losses for set-off.

INTER SOURCE ADJUSTMENT [SECTION 70]

(i) Inter-source set-off of losses: This section allows offsetting losses from one source against
income from any other source within the same income head. In simpler terms, losses from one
source can be adjusted against income from another source, provided both fall under the same
income head.

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Example : Loss from one house property can be set off against the income from another house
property.

(ii) Impermissible inter-source set-off: Inter-source set-off is not allowed in certain cases:

(a) Long-term capital loss (Section 70(3)): Only set off against long-term capital gain, not short-
term capital gain.

(b) Speculation loss (Section 73(1)): Set-off only against profits from another speculation
business, not against other business or professional income. Losses from other business can
offset profits from speculation.

(c) Loss from owning and maintaining race horses (Section 74A(3)): Set-off only against income
from owning and maintaining race horses.

(d) Losses from Specified business (Section 73A(1)): If shifting from the default tax regime
under section 115BAC(1A), loss in a specified business under section 35AD can be set off only
against another specified business.

INTER HEAD ADJUSTMENT [SECTION 71]

Loss under one income head can be set off against income under another, subject to certain
considerations:

(i) Loss under any head (except capital gains): Can be set off against income assessable under
any other head, including capital gains.

(ii) Loss under "Profits and gains from business or profession": Cannot be set off against
"Salaries"; allowed to set off from income under any other head except "Salaries."

(iii) Loss under "Capital Gains": Cannot be set off against income under any other head.

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(iv) Loss under "Income from house property": If assessee pays tax at concessional rate under
section 115BAC, loss not allowable for set-off against income under other heads. If opting out
of section 115BAC, the maximum loss set-off is `2 lakhs against income from any other head.

(v) Speculation loss and loss from owning and maintaining race horses: Cannot be set off
against income under any other head.

(vi) Losses from Specified business under section 35AD: If opting out of section 115BAC, can be
set off only against income from any other specified business; not against income under any
other head.

CARRY FORWARD & SET-OFF OF LOSS FROM HOUSE PROPERTY [SECTION 71B]

(i) Set-off and Carry Forward & Set-off of losses

(a) If the assessee exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A): In any assessment year, if there's a loss under "Income from house
property," it's first set off against income from any other head up to `2,00,000. Any remaining
unabsorbed loss is carried forward to the next assessment year for set-off against "Income from
house property."

(b) If the assessee pays tax at concessional rate u/s 115BAC: Loss under "Income from house
property" cannot be set off against income from any other head. The unabsorbed loss is carried
forward to the next assessment year to be set off against income under the same head "Income
from house property."

(ii) Maximum period for carry forward & set-off of losses: Loss under "Income from house
property" can be carried forward for up to 8 assessment years following the one in which the
loss was initially computed.

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CARRY FORWARD AND SET-OFF OF BUSINESS LOSSES [SECTIONS 72]

Under the Act, the assessee can carry forward business or profession losses if they cannot be
set off in the current year due to insufficient income in other heads. Section 72 allows the carry
forward and set-off of such losses against profits in subsequent years.

The right to carry forward business losses under Section 72 is subject to two conditions:

(i) The loss must have been incurred in business, profession, or vocation.

(ii) The loss should not be speculative in nature, meaning it should not arise from speculative
business activities.

(iii) Loss from one business can be carried forward & set-off against the income from any
other business: A carried-forward loss can be set off against income from business or
profession, not necessarily from the same source. However, it cannot be set off against income
from any other head besides "Profits and gains of business or profession."

(iv) Person who incurred the loss alone is entitled to carry forward & set-off the loss: Carried-
forward losses can only be set off against the profits of the entity that incurred the loss. The
successor of a business generally cannot carry forward and set off the losses of the
predecessor, except in cases of succession by inheritance.

(v) Maximum period for carry forward & set-off of losses: A business loss can be carried
forward for up to 8 assessment years following the year in which the loss occurred.

LOSSES IN SPECULATION BUSINESS [SECTION 73]

The definition of 'speculative transaction' is outlined in section 43(5), and the treatment of
income from speculation business has been previously discussed under the head "Profits and
gains of business or profession."

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(i) Set-off and carry forward & set-off of loss from speculation business: Speculation is
considered a separate business from others. Losses in speculation business cannot be set off in
the same year against non-speculation income or carried forward for set-off against other
income in subsequent years. If not set off in the same year against speculation profit, these
losses can only be carried forward and set off against income from other speculation
businesses. It's important to note that losses from trading in derivatives are not treated as
speculative losses.

(ii) Maximum period for carry forward & set-off of losses: Losses in speculation business can
be carried forward for a maximum of 4 years from the end of the relevant assessment year in
which the loss was computed.

(iii) When a business of a company deemed to be carrying on a speculation business: The

Explanation to this section states that if a company's business involves buying and selling shares
of other companies, it is deemed to be engaged in speculation business to the extent of such
share transactions.

The deeming provision doesn't apply to companies meeting the following criteria:

A. A company with gross total income mainly from "Interest on securities," "Income from house
property," "Capital gains," and "Income from other sources."
B. A company whose principal business is:

(i) Trading in shares,

(ii) Banking, or

(iii) Granting loans and advances.

These exempted companies are not subject to the Explanation, and thus, if they engage in
buying and selling shares of other companies, they are not deemed to be conducting
speculation business.

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CARRY FORWARD & SET OFF OF LOSSES OF SPECIFIED BUSINESSES [SECTION 73A]

(i) Set-off and Carry forward & set-off of losses of specified business: Opting out of the default
tax regime (Section 115BAC), if engaged in a specified business, allows an assessee to claim
deduction under Section 35AD for qualifying capital expenditure. Losses from the specified
business can offset profits of another specified business, and any unabsorbed losses can be
carried forward for set-off in subsequent years against profits of any specified business.

(ii) Loss can be set-off indefinitely: No specified time limit is specified for carrying forward and
setting off losses from a specified business, allowing indefinite carry forward for set-off against
income from that specified business.

LOSSES UNDER THE HEAD ‘CAPITAL GAINS’ [SECTION 74]

Carry forward & set-off of losses: Section 74 of the Income Tax Act deals with the carry forward
and set-off of capital losses. If there is a short-term capital loss or long-term capital loss for a
particular assessment year under the head 'Capital gains,' the following rules apply:

(i) Short-term capital loss: It can be set off against any capital gains, whether short-term or
long-term, in the same assessment year.

(ii) Long-term capital loss: It can only be set off against long-term capital gains in the same
assessment year.

(iii) Net loss under the head 'Capital gains': This loss cannot be set off against income under
any other head.

(iv) Maximum Carry Forward Period: Unabsorbed losses can be carried forward to the next
assessment year, but this carry-forward is limited to a maximum of 8 consecutive assessment
years from the one in which the loss was initially calculated.

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LOSSES FROM THE ACTIVITY OF OWNING AND MAINTAINING RACE HORSES [SECTION 74A (3)]

(i) Set-off and Carry forward & set-off of loss: According to Section 74A(3), losses from owning
and maintaining racehorses cannot be set off against income from any source other than the
activity of owning and maintaining racehorses.

(ii) Maximum period for carry forward & set-off of losses: The loss from owning and
maintaining racehorses can be carried forward for a maximum of 4 assessment years and set
off against income from the same activity in subsequent years.

(iii) Meaning of certain terms:

Amount of loss incurred by the assessee in the activity of owning and maintaining racehorses.

(i) In case assessee has no income by way of stake money –The amount of revenue
expenditure incurred by the assessee for maintaining racehorses must be exclusively and
wholly for that purpose.

(ii) In case assessee has income by way of stake money -The loss incurred is the difference
between income from stake money and the revenue expenditure exclusively for maintaining
racehorses, expressed as Loss = Stake money – Revenue expenditure.

Horse race

A horse race upon which wagering or betting maybe lawfully made.

Income by way of stake money

The gross prize money received by the owner of a racehorse for winning, placing second, or
achieving any lower position in horse races.

ORDER OF SET-OFF OF LOSSES

According to Section 72(2), the order for setoff is as follows:

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(a) Current year depreciation [Section 32(1)];

(b) Current year capital expenditure on scientific research and family planning expenditure to
the extent allowed;

(c) Brought forward business/profession loss [Section 72(1)];

(d) Unabsorbed depreciation [Section 32(2)];

(e) Unabsorbed capital expenditure on scientific research [Section 35(4)];

(f) Unabsorbed family planning expenditure [Section 36(1)(ix)].

SUBMISSION OF RETURN OF LOSSES [SECTION 80]

Section 80 outlines that business loss (Section 72(1)), speculation business loss (Section 73(2)),
specified business loss (Section 73A(2) if shifting from default tax regime), capital gains loss
(Section 74(1)), and racehorse activity loss (Section 74A(3)) cannot be carried forward and set
off unless the assessee files a return of loss under Section 139(3) within the specified time
under Section 139(1).

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