STUDENTS STUDY CIRCLE

SET OFF AND CARRY FORWARD OF LOSSES

SUNIL BN

sunilbn76@gmail.com

Set off : it refers to adjustment of losses against the eligible profits of the year . It is governed by section 70 and section 71 of the act. .

Set off

Inter Source Inter Head

Adjustment Adjustment

Within the same head of

income

With other heads of income

(Section 70 ) (Section 71)

Section 70 : Inter source adjustment

Setting off loss of one source against income from other source within the same head .

Examples • Loss of one self occupied

property can be set off against income let out property .

• Loss from textile business can be set off against profit of leather business

Taxable income from business = ( 500000 – 200000) = 300 000

Rules of inter source adjustment

rule 1) Loss from speculation business can be only set off only

against profit of a speculation business .

Loss from speculation business

Profit from non speculation business

Loss of non speculation business

Profit of speculation business

That is , loss from a non speculation business can be set off against profit of

• Non speculation business • Speculation business

But for setting off loss from a speculation business , you need to necessarily have income from a speculation business .

Rule 2 ) Loss from activity of owning and maintaining race horses can only be set off against income from same business .

NOTE : ACTIVITY OF OWNING AND MAINTAINING RACE

HORSES IS NOT A SPECULATIVE BUSINESS .

That is , it can be set off against profit of a business of owning and maintaining race horses .

(Rule 3 ) NO loss can be set off against winnings from lotteries ,

crossword puzzles etc .

.That is casual winnings is not available for set off against any type of loss , irrespective of under which head such loss has occurred .

(Rule 4) long term capital loss can only be set off against

long term capital gain .

THAT IS ,• Long term capital loss can be set off only against gain on sale of any other long term capital asset .

•It cannot be set off against short term capital gain .

However , for purpose of set off of short term capital loss , both short term capital gains and long term capital gains are available .

Summary : long term capital loss

Short term capital gains

Short term capital loss

Long term capital gains

Long term capital loss

Long term capital gain

( rule 5 ) loss from an exempt source of income cannot be set off against profit of a taxable source .

Example

Loss from agriculture (exempt u/s 10 ) cannot be set off against profit of textile business .

Long term capital loss on sale of shares in a recognized stock exchange (exempt u/s 10(38) ) cannot be set off against long term capital gains on sale of house .

Questions Loss of let out

property

Profit of deemed to be let out property

Loss of speculative business

Profit of leather

business

Loss from agricultural activities

outside india

Income from

debentures

Section 71: Inter Head Adjustment Under this section , loss which

could not be set off u/s 70 ( i.e. by way inter source adjustment ), can be set off against income under other heads .

However it is also subject to certain restrictions or rules .

Example

(Rule 1) loss from a speculation business cannot be set off against income of any other head .

It can be set off only against income from a speculation business .

(Rule 2 ) loss under the head “profits and gains of business or profession” cannot be set off against income from salary .

the term “ business “ in the above sentence refers to non speculation business only , as rule (1) already cover speculation business .

(Rule 3) Loss from activity of owning and maintaining race horses can be set off against income from the same business .

(Rule 4 ) Any loss under the head capital gains cannot be set off against any other head .

Long term or short term capital loss cannot

adjusted against income of any other head .

In short , provisions of section 71 shall not be

available for losses under the head “capital

gains’’

However , this doesn’t preclude income under the head “capital gains “ for being available for adjustment against losses under other heads .

Summary

Loss under capital gains

Any other head of income

Loss under head

“house property “

Long term / short term

capital gains

(Rule 5) No loss can be set off against winnings from lotteries , cross word puzzles , card games etc (casual winnings )

Summary of rules

•Long term capital gains

Long term capital loss

•Long term capital gains •Short term capital gains

Short term

capital loss

•Salaries •House property•Business income •Capital gains

Income from other

sources

Questions:

Loss of non speculation business

Profit from activity of

owning race horses

Loss of speculation business

Profit from activity of

owning race horses

U A D Long term capital gains

Carry forward of losses Losses which could not be set off

against income of the assessment year , do not lapse , but are allowed to be carried forward to be set off against income of subsequent years .

Carry forward of losses for each head is governed by different sections which define the no’s of years it can be carried forward for, against which income it can be set off etc

Section 71B: Carry forward of loss from “House Property “

Set off against: Future income under the head “House Property “ only .

Time period : maximum of 8 AY .

the time period is to be calculated from end of the relevant assessment year in which loss was suffered .

Example : if loss relates to AY 2012 -13 , it

can be c/f up to AY 2020 -21 .

Section 72: Carry forward of loss of non speculation business .

Set off against : future income from any business of assessee .

Time period: 8 AY

It is not necessary that it is must be set off against income from same business .

This c/f and set off is allowed even if the business in which loss was suffered , has been discontinued .

• However , if the business if transferred , the set off will not be allowed to the successor , unless such succession is by way of inheritance .

Example : loss of car business can be carried forward and set off against profit of computer business .

IMPORTANT NOTE:

The carried forward loss can also be set off against a business activity , even though such business activity is assessable under a different head .

Example : For example, when an assessee

is involved in letting out property on “floor area basis’’ , it is his business , but the income from it , for purposes of income tax is assessed under the head “House property’’ .

Section 41(5): Set Off Of Loss After Lapse Of 8 Years .In case of a business which was

discontinued , the loss of year of discontinuance , if not set off fully , shall be allowed to be set off even after the lapse of 8 years , on satisfaction of the following conditions .

Conditions : The business/ profession is discontinued . The loss of the year of discontinuance was not fully set off previously .

it is a non speculation business .

After discontinuation , there is a “ Deemed Business Receipt’’ . It includes :

sect 41(1) : Subsequent recovery of any expense , which was previously allowed .

sect 41(3) : Capital expenditure on scientific research if sold without being used for business proper .

sect 41(4) : Recovery of bad debts which was previously allowed .

Question1)Textile business : (a) current year loss (b)brought forward loss of AY 2007 -

08

2)Chemical business: (a) current year loss (b) bad debts allowed previously ,

Recovered . (c) brought forward loss of

assessment year 2012 -13

3) Leather business : profit of current year

compute income from business .

25,00080,000

NIL 30,00020,000

70,000

Solution: Profit of leather business Add: Recovery of bad debts u/s 41(4) ( chemical )

Total business income of current year available for set off .

Less; Set off of current year loss of textile business ( u/s 70)

Less : Set off of brought forward loss of 2007- 08

TAXABLE BUSINESS INCOME FOR AY 2013-14

70,00030,000

100,000

(25,000)

75,000 (75,000)

0

Section 73: Loss In Speculation Business .Set off against : Income of

speculation business only .

Time Period: 4 AY

It cannot be set off against any other head .

The business to which the loss pertains to may be discontinued .

Section 73A: Loss Of Specified Business u/s 35AD any loss computed in respect of

a specified business shall be allowed to be adjusted only profit of some other specified business.

If any loss remains unabsorbed as above , It can be can be carried forward .

Conditions for carry forward: Set off against: Future income of

specified businesses only.

Time period: it shall be allowed to carried forward without any time limit , until it is fully set off .

Section 74: carry forward of loss under the head “capital gains’’ Set Off Against: (1) Unabsorbed Short Term capital loss - long term capital gains

- short term capital gains .

(2) Unabsorbed Long Term capital loss - only against long term capital

gains .

Section 74A: carry forward of loss of activity of owning and maintaining race horses . Set off against: future income of

“same’’ business only .

time period: 4 AY .

Section 80 read with 139(3) : Return Of Loss

any assessee , who has sustained a loss in any previous year under the head ,

1) business or profession 2) capital gains 3) activity of owning and

maintaining race horses .

And claims to carry it forward for set off in future years , shall furnish a “Return Of Loss’’ u/s 139(3) .

This provision shall apply only to above mentioned losses it self .

Failure to submit return may render the loss unavailable for set off in future .

Section 32(2) UNABSORBED DEPRICIATION

Concept: depreciation can be charged only to the extent to bring profits to NIL .

Hence if profit < depreciation or , there is no profit , then (depreciation – profit ) is called as “ unabsorbed depreciation’’ .

Treatment: Inter Source Adjustment (70) :

UAD will be first set off against profit of any other business or profession ( if any ) .

Inter Head Adjustment (71) : it can be set off against income of other heads , except salaries and casual winnings .

Carry forward : set off against: ANY income

except salaries and casual winnings .

Priority of set off in future years: (1) Current year depreciation . (2) brought forward business loss

if any (3) Unabsorbed depreciation

time period : NO time limit .

It can be set off even the business to which UAD pertains to has been discontinued .

Problem solving technique : 1st step : look for losses which can

be set off by way of inter source adjustment .

2nd step: Next, the losses of CY which could not be set off completely in 1st step must be set off .

3rd step: Now consider the carry forward losses from LY and set them off .