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Set off or Carry Forward and Set off of Losses [Sections 70 to 80]

The provisions for set off or carry forward and set off of losses are contained in sections 70 to 80 of Income-tax Act and it involves the following three steps.

Step 1:         Set off of loss from one source against income from another source under the same head of income [Section 70]

Step 2:         Set off of loss from one head against income from another head (Inter-head adjustment) [Section 71]

Step 3:         Carry forward of loss to the subsequent assessment years to claim it as set off if it could not be set off under Step 1 and Step 2.

Step-1.       Set off of Loss from One Source against Income from Another Source under the Same Head of Income [Section 70]

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.

For example, 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.

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:

  1. 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.

  2. Loss of a specified business referred to in section 35AD: 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.

  3. 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.

  4. Loss an account of lottery, etc. 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.

  5. 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.

  6. 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.

  7. Loss arising from the purchase and sale of securities not to be allowed in certain cases [Section 94(7)].

Step-2 : Set off of Loss from one head against income from another head (Inter-head adjustment) [Section 71]

As per section 71(1), where in respect of any assessment year, if after setting off losses against income under the same head, the net result of the computation under any head of income, other than "Capital gains" is a loss, the assessee shall be entitled to have the amount of such a loss set off against his income, if any, assessable for that assessment year under any other head. For instance, loss from business can be set off from income under the head house property and loss under the head income from other sources may be set off against profits of business, etc.

Further, as per section 71(2), where in respect of any assessment year, the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has income assessable under the head “Capital gains”, such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head “Capital gains” (whether relating to short-term capital assets or any other capital assets).

However, losses under the head 'House Property', 'Capital gains' and 'Business or Profession' shall be treated as under:

  1. Loss under the head Business or Profession [Section 71(2A)]: Where in respect of any assessment year, the net result of the computation under the head "profits and gains of business or profession" is a loss and the assessee has income assessable under the head "Salaries", the assessee shall not be entitled to have such loss set off against such income. However, it shall be allowed to set off from income under any other head.

  2. Loss under the head 'Capital Gains' [Section 71(3)]: Such capital loss, whether short-term or long-term, shall not be allowed to be set off against income under any other head. It shall however be allowed to be carried forward.

  3. Loss under the head income from House Property allowed to be Set Off from any other head upto Rs. 2,00,000 [Section 71(3A) inserted by the Finance Act, 2017, w.e.f. A.Y. 2018-19]: Notwithstanding anything contained in section 71(1) or section 71(2), where in respect of any assessment year, the net result of the computation under the head "Income from house property" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds ` Rs. 2,00,000, against income under the other head.

Step-3 : Carry Forward and Set Off of Losses

If the losses could not be set off under the same head or under different heads in the same assessment year, such losses are allowed to be carried forward to be claimed as set off from the income of the subsequent assessment years. All losses are not allowed to be carried forward.

The following losses are only allowed to be carried forward and set off in the subsequent assessment years:

  1. House property loss;

  2. Business loss;

  3. Speculation loss;

  4. Loss on account of owning and maintaining race horses.

  5. Capital loss;

  6. Loss from a specified business referred to in section 35AD.

Compulsory Filing of Loss Returns [Section 80] :

Although the above losses are allowed to be carried forward, but the carry forward is allowed only when such loss has been determined in pursuance of a return of loss submitted by the assessee on or before the due date for filing of the returns prescribed under section 139(1). However loss under the head Income from house property can be carried forward even if the return is not filed within the due date mentioned under section 139(1).

Table Showing Set Off And Carry Forward Of Losses

Head of income under which Loss is incurred

Whether loss can be set off within the same year

Whether Losses can be carried forward and set off in subsequent years.

Time limit for carry forward and set off of losses

 

Under the same head

Under any other Head

Under the same head

Under any other Head

 

1. Income from Salaries

NA

NA

NA

NA

NA

2. Income from House Property

Yes

Yes

Yes

No

8 years

3. Profit and gain from Business or Professions :    

 

 

 

 

 

   a. Non-speculation Business

Yes

Yes

Yes

No

8 years

   b. Speculation Business

Yes

No

Yes

No

8 years

   c. Unabsorbed Depreciation

Yes

Yes

Yes

No

N.A.

   d. Unabsorbed Investment or                 Development allowance.

Yes

Yes

Yes

Yes

8 years

4. Capital Gain (Short-Term)

Yes

No

Yes

No

8 years

5. Capital Gain (Long -Term)

Yes

No

Yes

No

8 years

6. Income from Other Sources:

 

 

 

 

 

   a. Lotteries, Crossword, Puzzle, Card Games, Gambling, or betting of any form.

Yrs

No

No

No

NIL

   b. Loss from activity of owning and maintaining Race Horses

Yes

No

Yes

No

4 Years

   c. Other Income

Yes

Yes

No

No

NIL

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