SET OFF AND CARRYFORWARD OF LOSSES

Income under the Income Tax Act is taxable under five heads: 1. 2. 3. 4. 5. Income Income Income Income Income from salaries from house property from business or profession from capital gains from other sources

It is possible for an individual to have income under more than one head. The Income Tax Act has prescribed rules to set-off loss arising from one head against other heads of income. For example Gauravs salary is Rs.4 lacs p.a. However, he has made a loss of Rs.50,000 on sale of shares (capital loss). The question that arises is whether the loss on sale of shares can be set-off against his salary income. Set-Off & Carry forward Set-off means the process of reducing ones income using losses under other heads or same head of income.

Procedure for setting off losses:

Step 1: Set-off loss from same head of income Inter sourceadjustment Step 2: If the loss is still existing, loss can be set-off from other heads of income (subject to certain restrictions) Inter-head adjustments Step 3 : If loss still persists, the same can be carried forward to the subsequent assessment years Carry forward of losses

Step 1 - Inter source adjustment:

Under each head of income mentioned, there may be more than one source of income. For example, a person can have two or more businesses under the head Business Income. Under the IT Act, loss from one source of income can be set-off against another source of income under the same head i.e. Loss from a cloth business can be set-off against gain in a catering business. The restrictions to this form of setting off are as follows:

a. Loss from speculative business can be set-off only against gain from speculative business and not any other business income.

b. Loss from the activity of owning and maintaining race horses can be set-off only against gain arising from the activity of owning and maintaining race horses and not any other income.

c. Long term capital loss can be set-off against long term capital gains and not short term capital gains. Step 2 - Inter head adjustment:
If the losses cannot be set-off fully through inter source adjustment, they can next be set-off against other heads of income. This is called inter-head adjustment. The IT Act has prescribed specific rules setting off of losses between different heads of income, which are summarized as below. According to section 71, if there is a net result of loss in respect of any head of income during any assessment year the loss can be set off against the income of any other head of income.

Exceptions:1. Loss from speculation business. 2. Losses under head capital gains. 3. Losses from the business of owning and maintaining of race horses. 4. Loss from business/profession cannot be set of against income under head salaries (2005-06). 5. Loss from exempt income (loss of profit must be loss of taxable profit). 6. No loss can be set off against gains from winning from lotteries, crosswords, puzzles, card games or other gambling (section 58(4)).

SUMMARY TABLE

Sr. Secti No. on

Types of Loss

Set Off against Income

Can be carried forward (subject to Notes 4 and 8) for

In same Assessment Year 1 71/72 Business or Profession (other than speculation or depreciation) Unabsorbed Depreciation Any income under any head except Salaries

In subsequent Assessment Year Business Income only (Note 1) 8 years

32(2)

Any income under any head except Salaries Speculation profit only Any Capital Gain

Any income under any head except Salaries Speculation profit only Any Capital Gain

No restriction for of years number 4 years

73

Speculation Loss

70/74

Short-term Capital Loss Long-term Capital Loss Long-term Capital Loss on equity shares & units of equity oriented mutual fund which are subjected to STT Loss from Owning and Maintaining race horses House Property

8 years

70/74

Long-term Capital Gain Not eligible for set off

Long-term Capital 8 years Gain Not eligible for set off N.A.

71/74

74A

Only against income from horse races Any income under any head of Income

Only against income from horse races Income from House Property

4 years

71B

8 years

35AD

Losses from specified business

Income from specified business

No time Limit

Notes
1. From A.Y. 2000-01, conditions as to continuation of the same business in

which the loss was incurred, has removed. However Aseessee must be same except in case of inheritance etc. 2. Priority for set off of depreciation, business loss may be in the following order:

Current Years Depreciation Unabsorbed Business Loss Unabsorbed Depreciation