Meaning of Set off and carry forward of losses

Republished with Amendments up to Budget 2018

As per Income Tax Act 1961, a Person as defined in Section 2(31) can set off and Carry forward the losses incurred. It is a big boon to a Person, because it plays an important role on the financial condition of a Person who has incurred such Losses. So he can get relax to some extent.

Note: Loss from exempt source of Income cannot be set off against profit from any taxable source of Income, and no  losses can be set off against casual income.e g. Winning from lotteries, crossword puzzles,races,card games, betting etc.

Meaning of Set off and Carryforward.

Set off means adjusting the losses against the profit of that Financial year. In case if there is no adequate profits to set off the entire loss it can be carry forward to next Assessment Years subject to the conditions stated in the Act.

The sequence for set-off & carry forward of losses

1. Inter Source Adjustments:(Section 70)

Under this an Assessee can set off the Losses incurred in one source against the profits from any other source under the same head.

It is not possible for an Assessee to do intersource adjustment in the following cases.

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.

2.  Interhead Adjustments: (Section 71)

It is the second step in setting off of losses. If it is not possible for an Assessee to set off of losses under inter source adjustment he can set off the losses under inter head adjustments. Under this, an Assessee can set off the losses incurred under one head against the profits earned under other heads of Income in that financial year.

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 interhead 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.

3. Carry forward of Losses:

It is third step in Set off and Carry forward of losses. If it is not possible for an Assessee to set off the losses under intersource adjustments and interhead adjustments he can carry forward the same to the next Assessment Years. (Subject to the conditions given in the Act)

It is important to know that Carry forward Losses can be set off only against that head of income.It must be noted that an Assessee must file the Income Tax Return within the due date prescribed (under section 139(1)) to carry forward the losses except in the cases loss arising under the head house property (under section 71B) andcarry forward of unabsorbed depreciation (under Section 32(2)).

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.

UPDATE : Finance Act, 2017 has inserted Sec 71(3A) which has restricted the inter-head set-off of loss from House Property to Rs 2 Lakhs.

Illustration : If an assessee has loss under the head ‘House Property’ of Rs 7 Lakhs & income under the head ‘PGBP’ of Rs 10 Lakhs in AY 18-19, then only Rs 2 Lakh loss can be set off from business income. Balance Rs 5 Lakh loss shall be carried forward to the next A/Y and would be eligible for set off against the income from House Property only .

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 duedate prescribed under section139 (1) of Income Tax Act 1961, Otherwise he cannotcarry 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. Itcan 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).