This Article covers Income Tax Act Provisions that are related to carry forward and set off of losses. All Losses arising from exempted sources of income cannot be adjusted against taxable income. If an income source is exempt, then the loss cannot be set off against any income that is taxable.
Let’s look at an example: Agricultural income is exempted from tax. This means that if the taxpayer suffers loss due to agricultural activity, such loss cannot be applied against any other taxable income. The Income-tax law of India provides some benefits to taxpayers for sustaining losses. This article explains in detail the provisions in the law regarding set-off and carrying forward losses.
DEFINITION OF SET OFF LOSSES
The adjustment of losses against income or profit in a particular year is called set off. Losses not set off against income can be carried forward to subsequent years and used against income. You can set off against income in either an intra-head or inter-head way.
LOSSES CAN BE SET OFF
SIGNIFICANCE OF INTRA HEAD ADJUSTMENT
Any year in which the taxpayer has suffered loss from any source, under any head Income, then he can adjust such loss against income coming from any other source. The same head. Intra-head adjustment is the process of adjusting loss from one source against income from another source under the same heading. Adjustment of profit from business A to loss from business B.When making intra-head adjustments to loss, there are some restrictions.
INTER HEAD ADJUSTMENT: WHAT DOES IT MEAN?
The next step after making any intra-head adjustments is to make an inter-head adjustment. If the taxpayer suffers loss under any one of the income heads and has income under another head of income in any given year, he can adjust that loss to the other head. Before making any inter-head adjustment, it is important to remember the following restrictions. Before the taxpayer can make inter-head adjustments, he or she must first make intra-head adjustment. You cannot set off income from speculative businesses with losses. Non-speculative loss in business can be offset against income from speculative businesses. Income from other income heads cannot be used to set off losses under the heading “Capital gains”. Income from winnings from lottery, crossword puzzles and race (including horse race), as well as any other games or gambling of any kind or nature, cannot be set off by losses. You cannot set off losses from owning or maintaining race horses with any other income.
The loss from a business as defined under section 35AD cannot be offset against other income. Section 35AD applies to certain businesses such as setting up a cold-chain facility, operating warehousing facilities for agricultural produce storage, and developing and building housing projects. Income subject to tax under the heading “Salaries” cannot be used against losses from businesses and professions.
Beginning with the 2018-19 assessment year, losses under the heading “house property” will be allowed to be offset against any other income source only up to Rs. 2,00,000.
Unabsorbed loss may be carried forward to be set-off in the following years according to section 71B. (Provisions regarding the carry forward of loss from property are discussed later.
BEFORE MAKING ANY INTRA HEAD ADJUSTMENT, IT IS IMPORTANT TO REMEMBER THE RESTRICTIONS
1) Any income from speculative businesses cannot be set off by losses. Income from speculative businesses. Non-speculative business losses can also be possible Set off income from speculative businesses.
2) No income other than long-term capital loss can be offset by long-term capital losses from long-term capital gains. Short-term capital loss is possible, however. Against capital gains, long-term and short-term.
3) Losses from crosswords or lotteries cannot be set off by income. Puzzles, races, including horse race, card games, and any other type of game Avoid gambling of any kind or nature.
4) The business of racing horses can’t be lost Any income other than the income from the business of owning or maintaining race horses.
5) The loss from business as specified in section 35AD can’t be setoff against any other
Other income, except income from a specified business (section 35AD) is applicable Certain businesses, such as those that set up cold chains facilities, may be eligible for special treatment. Setting up and managing a warehouse facility for the storage of agricultural produce.
Income Tax Act Department is responsible for determining the income of an assessee in order to collect Taxes. The provisions under each head are used to determine whether the loss (losses other that dead losses) can be set off or carried forward. The Income Tax Act has five types of income, namely
Note: Under the Head Salary, there can never be any loss. Therefore, carry forward or set off of the same is not allowed.
CARRY FORWARD OF LOSSES
Unadjusted loss can still occur after making the necessary and permissible inter-head and intra-head adjustments. These unadjusted loss can be carried forward into future years to adjust for income. Different income sources have different rules regarding carry forward.
LOSSES ON HOUSE PROPERTY
You can carry the loss forward for up to 8 years after the year of the assessment. Only income from house property can be adjusted.
LOSSES IN NON-SPECULATIVE BUSINESSES(REGULAR BUSINESS)
SPECULATIVE BUSINESS LOSS
SPECIFIED BUSINESS LOSSES UNDER 35AD
There is no Limit to carry forward losses from the business in question under 35AD
It is not necessary to continue the business in the future.
If the return is not received by the due date, it cannot be carried forward.
Only applicable to income from a specified business below 35AD
You can carry the loss forward for up to 8 years after the assessment year it was made
Only long-term capital gains can be used to offset capital losses.
You can offset short-term capital losses against long-term capital gain.
CASE LAWS ON SET OFF AND CARRY FORWARD OF LOSSES
1. Jamna Dass Rameshwar Das v. CIT 21ITR 109 (Punjab) – Assessee did business of speculation in silver, gold and linseed – During relevant assessment year, he showed a gross loss in speculative transactions – ITO however, rejected assessee’s claim on ground that assessee had not maintained contemporaneous record of speculative transactions since assessee failed to do so, revenue authorities were justified in rejecting assessee’s claim.
2.CIT v. Ashok Mittal 357ITR 245(Delhi)- In this Case it was held that assessee can set off brought forward speculative business loss against the speculative profit even before setting off the non- speculative business loss of the year.
3. CIT v. S.C. Kothari  82 ITR794(SC) – it was held that the loss of an illegal speculative transaction cannot be set off against the profit of another lawful speculative transaction. If however the business was the same, then the loss would be liable to be taken into account while computing the profit u/s 28(i)
4. CIT v. Mahalakshmi Sugar Mills Co. Ltd. 160 ITR920(SC) – In this case it was held that it is the duty of the assessing officer to apply the relevant provision of the Act for the purpose of determining the true figure of the assessee’s taxable income and the consequential tax liability. Only because the assessee fails to claim the benefit of set off, it cannot relieve the Income Tax officer of his duty to apply section 72 in an appropriate case.
The concept of set-off and carry-forward helps us understand that the tax system is flexible. There is sufficient scope of adjustment of losses under this system. As we have seen different heads of income and their provision related to set off and carry forward, we can say that loss should be set off on intra head Basis in the same Assessment Year and if still there is a loss then only inter head set off is allowed. After completing first two steps only if any loss remains then it will be Carry forward and will set off in next Assessment Year under the same head of income and not different head. But there still exception to it for example Losses in Speculation Business can only be set off against the same head for that particular Assessment Year. The rule of set-off and carry-forward must be followed in strict accordance with the exemptions and restrictions mentioned in the Income Tax Act, 1961.