Set-off & carry-forward of losses under Income-Tax Act, 1961

‘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.

This article explains Loss from Business/profession [Section 72], Loss from a house property [Section 71B], Loss from capital gains (Section 70 – 74) and Loss under the head ‘Other sources’ (Section 71).

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. 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]

* 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.

* In case in any Assessment Year, the assessee has house property loss, then he is entitled to set off such loss against income under other head upto a limit of Rs. 2 lakh per annum. The balance, if any, shall be carried forward.

* 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.

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 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.

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.

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(Republished with Amendments by Team Taxguru)