Income tax department known for collection of heavy taxes on income being earned by the assessees also provide them relief at the time they incur losses. In the eyes of assessee IT Department has always been harsh when it comes to collection of taxes but there is opposite side also i.e. Department allow the assessee to Set off or Carry Forward and Set off the losses subject to some conditions and restrictions being discussed in the article.

Basic Meaning of Phases

Set off

Set off means setting off the loss in the same Assessment Year in which it is incurred.

Carry forward and Set off

Carry forward and Set off means carrying forward the losses and setting them off in the future Assessment Years.

Dead Losses

Dead Losses means the losses which has no tax treatment. In this article dead loss means the losses arising from the source,income of which is exempted under the law.

There are total five heads of income under Income Tax Act namely:

  1. Income under the head Salary
  2. Profit or Gains from Business or Profession
  3. Income under the head Capital Gains
  4. Income under the head House Property
  5. Income under the head Other Sources

Whatever income assessee earns is being classified under the five heads under Income Tax Act for the purpose of collection of Taxes. For the purpose of Set off or Carry Forward and Set off of the losses (losses other than Dead Losses) under the five heads also the provisions are made keeping in mind the heads of income.

Set off or Carry forward and Set off of the losses under the head Salary:

As there can never be a loss under the head salary set off or carry forward of the same is not possible.

Carry forward and Set off of the losses under the head Other Sources is not allowed.

Set Off of Losses

Set off of the losses is being allowed in the following manner:

  1. Intra Head Adjustment
  2. Inter Head Adjustment

1. Intra Head Adjustment

Intra Head means setting off the loss within the same head. Example: Setting off the loss under PGBP from manufacturing business with the income under PGBP from trading business. Under the Income tax Act all kind of Intra head adjustments are allowed except the following cases:

  1. Losses from speculative business cannot be set off against income from non-speculative business. But Losses from non-speculative business can be set off with income from speculative business.
  2. Long Term Capital Loss cannot be set off with Short Term Capital Gain.
  3. No Loss can be Set off with any casual income i.e. Income from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.
  4. Losses from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.
  5. Losses from the business specified under Section 35AD (Specified Business) cannot be set off against Incomes other than income from business specified under Section 35AD. But Losses from Non-Specified Business can be set off against Income of Specified Business.

2. Inter Head Adjustment

Inter Head means setting off the loss of one head with income of other head. Example: Setting off the loss under the head PGBP with the Income under the head Capital Gains. Under the Income tax Act all kind of Inter head adjustments are allowed except the following cases:

  1. Losses from speculative business cannot be set off against income under any other head.
  2. Losses under the head PGBP cannot be set off against Salary Income.
  3. Losses under the head Capital Gain cannot be set off against any other head. But Losses under any other head can be set off with Income under the head Capital Gain.
  4. NO loss can be set off against casual incomes.
  5. Losses from the business of owning and maintaining race horses cannot be set off against any other head.
  6. Loss from the business specified under section 35AD cannot be set off against any other head of income.

Carry Forward & Set Off of Losses

The losses which could not be set off either by way of Intra head adjustments or Inter head adjustments are allowed to be carried forward to the future years subject to the conditions and restrictions as prescribed by the Act. Income Tax Act does not allow Carry forward and set off of Losses under the head Other Sources.

Losses under the various heads of income can be carried forward and set off only if the return has been filed on or before the due date of filing the return of income. But this provision does not apply in case of carry forward of Loss under the head income from House Property, it means loss under the head house property can be carried forward even if the return is filed after the due date.

However there is no restriction on setting off the losses if the return is filed after the due date.

Losses under the head PGBP:

It can be set off against any income except salary in the year the loss is incurred. If the loss could not be set off in the year loss was incurred it can be carried forward up to 8 Assessment Years and loss will be allowed to set off against income under the head PGBP. It can be simply concluded that in the year the loss is incurred both intra & inter head adjustments are possible, but in the years of carry forward only intra head adjustments are possible.

Losses under the head Capital Gains:

It can be set off or carry forward and set off in the following manner:

   Losses                                                   Set off/Carry forward and Set off

Long Term Capital Loss                  Long Term Capital Gain

Short Term Capital Loss                 Long Term Capital Gain/Short Term Capital Gain

The losses which could not be set off in the year in which loss was incurred can be carried forward for 8 Assessment Years.

Losses under the head House Property:

It can be set off against any income in the year the loss is incurred. If the loss could not be set off in the year loss was incurred it can be carried forward up to 8 Assessment Years and loss will be allowed to set off against income under the head House Property. It can be simply concluded that in the year the loss is incurred both intra & inter head adjustments are possible, but in the years of carry forward only intra head adjustments are possible.

Losses from the business of owning and maintaining race and speculative business:

It can be set off only against the income of same source in current year as well as in the year of carry forward. The losses can be carried forward up to 4 Assessment Years.

Losses from the business specified under section 35AD:

It can be set off only against the income of Specified business under section 35AD. The losses which could not be set off can be carried forward indefinitely.

Disclaimer: This Article is just for information sharing. No Liability in case of any error.

TaxGuru Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)

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