Wednesday, March 22, 2017

Set Off and Carry Forward of Losses

Unit – 3: Set off and Carry Forward of Losses
Meaning of Set off and Carry forward
Set-Off of Losses: The adjustment of losses from one head against the income, profits or gains of any other head of income during the same tax year is called set-off of losses.
Carry-Forward of Losses: Where the losses are not fully adjusted against the income of the same tax year and such losses are transferred to the next tax year, this process of transferring un- adjustable losses to the next year is known as carry-forward of losses.
A) Set off of loss under the same head of income.(Sec.70: Inter-source set off): The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called inter-source adjustment, e.g. Adjustment of loss from business A against profit from business B.
Income of a person is computed under five heads. ‘Sources’ of income derived by an individual may be many but yet they could be classified under the same head. For instance, an individual may have a dual employment, yet the income would be classified under the head ‘Salaries’. However, given the mechanism of computing taxable salary income, it would be safe to say that an individual cannot incur losses under this head of income. Some of the inter-source adjustable incomes are given below:
a. Speculative Business Losses: An Assessee can set off the Losses incurred in speculation Business only against the profits of any other speculation Business. It is not permissible to set off speculative Loss against any other Business or Professional Income. An Assessee has an Opportunity to set off any other Business Loss with the profits of speculation Business.

b. Long Term Capital Losses: A long term Capital Loss can be set off only against the profits of any other long term capital gains, but short term capital loss can be set off against both short term and long term capital gains.
c. Loss from owning and maintaining race horses: This loss can be set off only against the income from owning and maintaining race horses.
d. Loss of specified Business under section 35AD: Specified Business loss can be set off only against profit from such specified business, but loss from other business can be set off against the profit of the specified business.
B) Set off Loss from one head against Income from another Head (Sec. 71: Inter head set off): After making inter-source adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head   against income from other head, E.g., Loss under the head of house property to be adjusted against salary income.
A person may have various sources of income computed under different heads of income. Loss under one head of income is generally allowed to be set off against income under another head. Some of the inter-head adjustable incomes are given below:
a. House Property Losses: House Property Losses can be set off against profits from other heads. It can be set off against salary income, Business income, Income from capital gain, and income from other sources except casual income.
b. Non Speculative Business Losses: Non speculative Business Losses can be set off under any other head except income from salary. Means it can be set off from income from house property, income from capital gain and Income from other sources except casual income.
In the following cases losses cannot be set off under inter-head adjustments. Speculative Business Losses. Specified Business Losses. Capital Gain Losses.(Both short term capital loss and long term capital loss). Losses from owning and maintaining race Horses.
C) Carry forward and set off of losses: Many times it may happen that after making intra-head and inter-head adjustments, still the loss remains unadjusted. Such unadjusted loss can be carried forward to next year for adjustment against subsequent year(s)’ income Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income.
Unabsorbed loss under house property, capital loss and business loss can be carried forward for 8 years. Unabsorbed speculation business loss can be carried forward only for a period of 4 years.
Loss can be carried forward and set off even if the business in respect of which it was incurred has been discontinued. However, such loss cannot be set off against income under any other head. An exception exists in respect of unabsorbed depreciation from business which can be set off against any other source of income in the absence of business income and can be carried forward indefinitely, even if the business through which depreciation was incurred has ceased to exist. Carry forward of losses (other than loss from house property and unabsorbed depreciation) is permissible if the return of income for the year, in which loss is incurred, is filed in time. The late filing of return should not impact the status of carry forward of loss of previous years.
Rules regarding carry forward of losses of various heads are given below
a. House Property Losses: (Section71B) An Assessee can carry forward the losses incurred under the head house property up to 8 years immediately succeeding the Assessment year in which the loss has incurred. It can be adjusted only against Hose property Income. In this case an Assessee can file belated return.
b. Non Speculative Business Losses:(Section 72) An Assessee can carry forward Non speculative business loss up to 8 years immediately succeeding the Assessment Year in which the loss has incurred. An Assessee must file Income Tax Return within due date prescribed under section139 (1) of Income Tax Act 1961, Otherwise he cannot carry forward the losses. It can be set off only against business income.
c. Speculative Business Losses:(Section 73) An Assessee must file the Income Tax Return within due date prescribed under section 139(1) to carry forward the losses from speculation Business. It can be Carry forward up to 4 years immediately succeeding the Assessment year in which the loss has incurred. It can be adjusted only against income from speculation Business.
d. Specified Business Losses:(Section 73A) It can be Carry forward subject to the following conditions: An Assessee must file Income Tax Return within Due date prescribed under section 139(1). It can be adjusted only against the income from specified businesses. It can be carry forward for any number of years.
e. Long term/Short term Capital Losses:(Section 74) An Assessee can carry forward the long term or short term Capital losses subject to the following conditions. An Assessee must file Income Tax Return within due date prescribed under section 139(1). It can be carry forward up to 8 years immediately succeeding the Assessment year in which the loss has incurred. Long term capital loss should be adjusted with only long term capital gains, but short term capital loss can be adjusted with short term capital gains or long term capital gains.
f. Loss from Owning and maintaining race horses: (Section 74A) An Assessee can carry forward these losses up to 4 years immediately succeeding the Assessment year in which the loss has incurred. It can be set off only against that income and an Assessee must file the Income Tax Return within due date prescribed under section 139(1). 
Unabsorbed depreciation: Section 32(2)
If there is a loss under business and profession and the reason for such loss is depreciation, then it is called unabsorbed deprecation and it shall be allowed to be carried forward. Unabsorbed depreciation allowance shall be added to the depreciation allowance for the following previous year or years and so on infinitely and deemed to be part of that allowance. The depreciation shall be carried forward even the business/profession to which is relate even of the business/profession not in existence. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation.
The assessee should set off brought forward losses in the following manner:
a)      First of all current year depreciation will be adjusted.
b)      Then brought forward business losses will be set off (speculative or non-speculative)
c)       Then unabsorbed depreciation will be set-off against business income.
d)      Unabsorbed depreciation can be carried forward for indefinite number of years.
e)      Unabsorbed depreciation can be set off from any head of income other than Salary and Capital Gain in any year.
Master Chart of Set-off and Carry forward of Losses

Heads of Income
Set Off During the Same A/Y
Carry Forward  of Losses
Same Head
(Sect. 70)
Another Head
(Sec. 71)
Against which Head
Carry Forward
Years
Against which Head
1. Salary
Since No chances of Loss, set off and carry forward of losses is not applicable
2. House Property
YES
YES
Any Head Except Casual Income
YES
8
SAME HEAD
3. PGBF
YES
YES
(Including Speculative Business)
Any Income Excluding Salary & Casual Income
YES
8
SAME HEAD
(Including Speculative Business)
4. Long Term Capital Gain(LTCG)
YES
NO
LTCG
YES
8
LTCG
5. Short Term Capital Gain(STCG)
YES
NO
LTCG/STCG
YES
8
LTCG/STCG
6. Income from other sources
YES
YES
ANY
Not Applicable (NA)
NA
NA
7. Speculative Loss
YES
NO
Speculative Gain
YES
4
Speculative Gain
8. Unabsorbed Depreciation
YES
YES
ANY INCOME
YES
NO Limit
ANY INCOME
9. Maintenance of race horses
YES
NO
Same Item
YES
4
Same Item
10. Specified Business U/S 35AD
YES
NO
Specific Business
YES
NO Limit
Any Specific Business
11. Loss in respect of Casual Income
Cannot be set off at all
12. Loss from exempted sources e.g. agricultural
YES
NO
Agricultural income
Cannot Be Carry Forward
Note:
1.       No deduction for expenses can be claimed against casual income
2.       For any loss to be carried forward and set-off against the income of a subsequent year the return of such loss must be filed under sec. 139. If no return is file for the year in which the loss was incurred, the right to carry forward the loss is lost.
3.       Order in which current and brought forward losses are to be adjusted:
a)      Current depreciation
b)      Capital expenditure on scientific research
c)       Current loss of another business
d)      Brought forward losses of earlier years (Oldest loss can be adjusted first)
e)      Brought forward unabsorbed depreciation

f)       Brought forward unabsorbed capital expenditure on scientific research.

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