The colour of money
The Income-Tax Act, 1961, allows set-off and carry-forward of the loss incurred by any assessee subject to some restrictions Apart from other information, the new income-tax forms, ITR-1 to ITR-8, notified by the Central government seeks details on set-off of losses. Now almost every assessee has to give this information. Therefore, one has to be aware of the exact provisions relating to set-off. Otherwise there is every possibility of claiming incorrect set-off.
‘Loss’ in common parlance is understood as excess of expenses over income. The Income-Tax Act, 1961, allows set-off and carry-forward of the loss incurred by any assessee subject to some restrictions. Let us see the relevant provisions relating to set-off of losses under the different heads of income:
* Loss from Business/profession [Sec 72]
* Any loss under the head, ‘profit and gain of business,’ other than speculation loss and depreciation can be set off against any other business income or any other head of income, except salary income, in the same assessment year.
* After such setting off, if the resultant figure is yet a loss (business loss): If the loss in greater than income from any other business or income from any other head, then such loss can be carried forward up to eight assessment years. On carrying forward to subsequent years, this loss can be set off only against business income and not against any other head of income.
* Speculation loss can be set off only against speculation profit in the same assessment year. But even after such setting off if the resultant figure is a loss, then it can be carried forward for set off in subsequent years up to four assessment years. From assessment year 2006-07 up to assessment year 2005-06 such loss could be carried-forward for eight assessment year. In subsequent years, setting-off of the loss is allowed only against speculation profit [Section 73].
Transactions in derivatives entered into on recognised stock exchange through a broker or a Securities and Exchange Board of India (Sebi)-recognised intermediary and supported by a time-stamped contract note is excluded from the definition of speculative transaction [Section 43(5)(d)]. Thus, such loss is to be treated in the same manner as ‘non speculative business loss’.
Speculative business loss can be set off against only speculative business income. But non-speculative business loss can be set off against any business income (whether speculative or non speculative) .
* Depreciation can be set off in the same assessment year as well as in the subsequent assessment years against business income or any other head of income except salary income. Further, depreciation can be carried forward indefinitely for set-off in subsequent years [Section 32(2)].
* As unabsorbed depreciation can be carried forward for any number of years. In subsequent years, one must first set off current year’s depreciation, then brought forward business loss and then the unabsorbed depreciation.
* Continuity of business is now not necessary for the purpose of set-off and carry-forward.
* Loss from a house property [Sec 71B]
* Loss arising from a house property can be set off against income from any other house property or income from any other head in the same assessment year.
* If income from house property is negative even after such set-off, then such loss can be carried forward up to eight assessment years for set-off. But in subsequent years, it can be set off only against income from house property.
* Loss from capital gains (Section 70 74)
* Short-term capital loss can be set off against any capital gain income, long term or short term, in the same assessment year. It should be noted that such loss can be set off only against capital gain income and not against any other head of income. Balance short-term capital loss if any can be carried forward up to eight assessments years. In the subsequent years also, it can be set off against any capital-gain income.
* Long-term capital loss
i) Long-term capital loss arising on sale of capital asset other than equity shares and units of equity-oriented mutual fund which are subject to securities transaction tax (STT) can be set off in the same assessment year as well as in subsequent assessment years (in case of carry-forward) only against long-term capital gain income. Carry-forward of loss is allowed up to eight assessment years.
ii) Long-term capital loss arising on sale of equity shares and units of equity-oriented mutual fund, which is subject to securities transaction tax (STT), is not allowed to be either set off or carried forward (as income from such source is exempt from tax) [Section 14A].
* Loss under the head ‘Other sources’ (Section 71)
Any loss under the head, ‘Other sources’ can be set off in the same assessment year against income from any other source or income from any other head. Salary, business/profession . The loss cannot be carried forward for set-off in future.
* Loss from owning and maintaining race horses [Section 74A] Any loss arising from owning and maintaining race horses can be set off against income from such activity only in the same assessment year or in subsequent assessment years (in case of carry- forward). In case of this loss, it is allowed to be carried forward up to four assessment years.
Loss under any head can be set off against speculative income, capital gain income, income from maintaining race horses. But the reverse is not possible. Loss from speculation, loss under capital gain and loss from maintaining race horses can be set off only against the respective specific income. In other words, loss from speculation can be set off only against speculation income. Loss from capital gain can be set off only against capital gains income and so on.
A loss from any source cannot be set off against winnings from lotteries, crossword puzzles, races (including horse races), card games, other games or any sort of gambling or betting. Loss on bonus stripping/dividend stripping cannot be set off against any income. Return of loss must be filed within due date of filing of return or else carry-forward of loss to the subsequent year is not allowed. However, this condition does not apply in case of house property loss and unabsorbed depreciation.