Provisions pertaining to Set-Off and carry forward of losses are divided in 3 parts:

  • Part 1 deals with Set off of loss from one source against income from another source under the same head of income.(Section 70)
  • Part 2 deals with Set off of loss from one head against income from another head (Section 71)
  • Part 3 deals with Carry forward of losses to subsequent years (Section 71B, 72, 73, 73A,74, 74A)

Note: Set-off to be followed in above sequence only.

Part 1 : Set off of loss from one source against income from another source under the same head of income:

Loss from one source of Income can be setoff against Income from another source of Income under same head subject to few exceptions as under:

  • Loss from speculation business can be setoff only against profit from speculation business
  • Long term capital loss can be setoff only against Long term capital gain
  • Loss from activity of owning and maintaining race horses can be setoff only against same income.
  • Loss from specified business referred u/s 35AD can be setoff only against another specified business.
  • Loss cannot be setoff against winnings from lotteries, crossword puzzles, races, card games, and other games.

Part 2 : Set off of loss from one head against income from another head

Loss under one head of Income can be setoff against Income under another head of Income subject to few exceptions as under:

  • Loss from speculation business cannot be setoff against any other head of Income.
  • Loss under the head “Capital gains” cannot be setoff against any other head of Income.
  • Loss from activity of owning and maintaining race horses cannot be setoff against any other head of Income..
  • Loss from specified business referred u/s 35AD cannot be setoff against any other head of Income.
  • Loss cannot be setoff against winnings from lotteries, crossword puzzles, races, card games, and other games.
  • Normal business loss cannot be setoff against Income under the head “Salaries”
  • Loss under the head “ Income from House property” can be setoff against any other head of income subject to maximum of Rs.2 lacs for particular assessment year.

Part 3 : Carry forward of losses to subsequent year

Loss which could not be setoff as per Part 1 i.e under the same head or as per Part B i.e under different head in the same year can be setoff against income of subsequent year as under:

Section Nature of Loss Setoff against which Income Max. period loss can be C/F
71B Loss under Income from house property Income under Income from house property 8 assessment years
72 Loss from normal business under the head Profit and Gains from business or profession Profit from any normal business 8 assessment years
73 Loss from Speculation Business Profit from any Speculation business 4 assessment years
73A Loss from specified business referred in sec 35AD Profit from any specified business referred in sec 35AD No limit
74 Short Term Capital Loss Capital Gains(Both Short term and Long term) from any other capital asset. 8 assessment years
Long Term Capital Loss Only Long term Capital Gain from any capital asset. 8 assessment years
74A Loss from activity of owning and maintaining race horses Income from activity of owning and maintaining race horses 4 assessment years

Additional points:

  • A Loss other than loss under the head Income from house property cannot be carried forward unless return is filed within the time allowed u/s 139(3) r.w.s 139(1).
  • Unabsorbed depreciation, Family Planning expenditure and capital expenditure on scientific research can be carried forward without any limit as they are not governed by sec 72.
  • Loss from sources whose income is exempt from tax u/s 10 cannot be setoff against any source of income chargeable to tax.
  • Loss can be carried forward only by the assessee who has incurred loss except in case of amalgamation, demerger, proprietary concern or firm taken over by company and business acquired by inheritance.
  • Business may or may not continue in the year in which loss is setoff.

Author Bio

Qualification: CA in Practice
Company: Nitesh Patel & Co.
Location: Mumbai, Maharashtra, IN
Member Since: 06 Mar 2019 | Total Posts: 1

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