Summary: Under the Income Tax Act, losses from different heads of income can be set off against corresponding income in the same assessment year. Specifically, for speculation business losses, Section 73 mandates that they can only be set off against income from speculation business. For example, if a business earns income from regular business and incurs a loss in speculation trading, the speculation loss cannot offset the regular business income. The loss can only be set off against speculation income in the same year. If not fully utilized, speculation losses can be carried forward for up to four years and set off against future speculation profits. However, in cases where both speculative and non-speculative business incomes exist, taxpayers have two options for setting off losses: (1) set off carried-forward speculation losses first and then current year losses, or (2) set off current year speculation losses and carry forward earlier year’s losses against remaining profits. This approach helps taxpayers manage their losses effectively within the specified rules and timelines.
We know that there are five heads of Gross Total Income and sometimes there may be loss under any head of income. The question arise that the amount of loss is to set-off against the same head of income? As per Section 70 to 80 of the Income tax Act, there is a provisions that it may be set-off against any head for the same assessment year. If it is not possible to set-off loss in the same assessment year, there is a provision of carried forward of the loss.
Section 70: Set of loss from one source against income from other source under the same head of income.
(1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than ‘Capital gains’, is a loss, the assesse shall be entitled to have the amount of such loss, set-off against his income from any other source under the same head.
Accordingly during any assessment year, if there is a loss and under the same head there is income, amount of loss can be set off against income. That means set off of Loss from one source against another source under the same head of income. There are certain restrictions that is to be taken in to account.
Speculation business loss can be set off against only income from speculation business.
Under the head Income from Business or Profession, we are showing both types of business income, i.e. Regular Business income and Speculation business income. But if there is income from regular business and there is loss from Speculation Business, the loss cannot be set off against regular business income. Speculative loss can be set off only against speculative income. This loss can be carried forward for four assessment years and will be set off only against speculative income. In other words, speculation loss can be setoff in the same year only against the speculation profits. Unabsorbed speculation loss will be carried forward and setoff against speculation profits of the subsequent assessment year up to 4 years (Section 73(4). It may, however, be noted that loss under any other head of income other than “Capital gains”, can be set off against the speculation profits in the same assessment year, section 71.
Illustration: Mr. Shailesh Shah is doing his own business of buying and selling of cloth. During the financial year 2023-24 there is an income of Rs.10,00,000. During the same financial year he has done certain transactions of selling and buying of shares, wherein there is a loss of Rs.5,00,000. Can he set off loss of shares against his business income?
The answer is simply NO.
In the case of a company deriving its income mainly under the head “Profits and gains from business or profession”, and where any part of its business consist of purchase and sale of shares, such business shall be deemed to be speculation business for the purpose of section 73.
In respect of speculation business, the assesse has an option as under:
(i) either to first set off the speculation losses carried forward from an earlier year, against the speculation profits of the current year and then to set off the current year’s losses from other sources against the remaining part, if any, of the current year’s speculation profits;
(ii) or to first set off the current year’s losses from non- speculation business and other sources against the current year’s speculation profits and then to set off the carried forward speculation losses of the earlier years against the remaining part, if any, or the current year’s speculation profits.
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