Where the net result for any assessment year in respect of any source, falling under any head of income other than "capital gains", is a loss, the assessee shall be entitled to have the amount of such loss set off' against his income from any other source under the same head. This may also be referred to as intra-head adjustment.
If the assessee has two houses and the net income from one house is Rs. 4,80,000 while from the other house there is a loss of Rs. 3,00,000, the loss shall be adjusted against the income (as both fall under the same head i.e. 'Income from house property') and after set off, the income under the head 'income from house property' shall be Rs. 1,80,000.
Exceptions to Section 70 (Intra-Head Adjustment not permitted)
However, there are certain exceptions to this rule. In the following cases loss from one source cannot be adjusted against income from another source of income although it falls under the same head:
(a) Loss from a Speculation Business:
As per section 73, any loss, in respect of a speculation business carried on by an assessee, shall be set off only against income of another speculation business. It cannot be set off from non-speculative business income, although speculation business also falls under the head 'profits and gains of business or profession'.
However, a business loss can be set off against income from speculation business but vice versa is not possible.
What is a speculation business:
According to section 43(5) "Speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
(b) Loss of a Specified Business referred to in section 3SAD:
As per section 73A, any loss computed in respect of any specified business referred to in section 35AD (e.g. business of cold chain facility, business of building and operating hotel, business of warehouse for storage of agricultural produce, etc.) shall not be set off except against profit or gains, if any, of any other specified business. It cannot be set off from any other business income.
(c) Loss from the Activity of Owning and Maintaining Race Horses:
As per section 74A, the loss incurred by the assessee, in the activity of owning and maintaining race horses, shall only be set off against the income of such activity. It cannot be set off against the income from any other source.
(d) Loss an account of Lottery, etc.
This Loss cannot be set off against winnings from lotteries, crossword puzzles, card games., etc.: No expenditure or allowance is allowed from winnings from lotteries or crossword puzzle, etc. Similarly, no loss from any lottery, card games, races, etc. is allowed to be set off from the income of the winnings of lotteries, crossword puzzles, card games, races, etc.
(e) Loss from a Source which is Exempt:
Loss incurred by an assessee from a source, income from which is exempt, cannot be set off against income from a taxable source. [CIT v Thragarajan (S.S.)(l981) 129 ITR 115 (Mad)]
(J) Long-Term Capital Losses:
Short-term capital loss can be set off from any capital gain (long-term or short-term) but long-term capital loss can now be set off only against long-term capital gain.
W.e.f. A.Y. 2019-20 long-term capital gain for a transfer of equity shares listed or recognized stock exchange is now taxable @ 10% and hence if there is any long-term capital loss from these equity shares, such loss shall now be allowed to be set off from other long-term capital gain.