I SET OFF OF LOSSES (Sec 70 and 71)
Set off of losses refers to adjustment of current year losses against current year incomes.
Rules A: Set off of losses – Intra head adjustments (Inter source adjustments)
Loss from one source of income can be adjusted against income from some other source of income under the same head.
Ø For example :Loss from HP1 can be adjusted against income from HP2
It is subject to the following exceptions
1. Loss from speculation business cannot be set of against profit from an non speculation business
(Interpretation: Loss from non speculative business can be set-off against speculation income)
2. LTCL can only be set off against LTCG and cannot be set off against STCG
(Interpretation: STCL can be set off against LTCG)
3. No loss can be set-off against casual income
4. No expenses can be claimed against casual income
5. Loss from the activity of owning and maintaining race horses cannot be set off against other incomes
6. Loss from an exempted source cannot be set off
(e.g. Share of loss of firm, agricultural losses, cultivation expenses)
Rules B: Set off of losses – Inter head adjustments
Loss from one head of income (HP) can be adjusted against income from some other head of income.(Salary Income): It is subject to the following exceptions
Ø For example: Loss from HP can be adjusted against Salary Income or Business Income
It is subject to the following exceptions:
1. Loss from speculation cannot be set of against any other head.
(Interpretation: Loss from other heads can be set-off against business income)
Ø For Example: HP loss can be set-off against Speculative Incomes but speculation loss cannot be set off against HP
2. Business loss cannot be set-off against salary income. (It can be set-off against other incomes)
3. Loss under the head Capital Gains (LTCL or STCL) cannot be set-off against any other head.
(Interpretation: Loss from other heads can be set-off against Capital Gains)
Ø For Example: HP loss can be set-off against CG but LTCL or STCL cannot be set off against HP
4. No loss can be set-off against casual income
5. No expenses can be claimed against casual income
6. Loss from the activity of owning and maintaining race horses cannot be set off
7. Loss from an exempted source cannot be set off
(e.g. Share of loss of firm, agricultural income, cultivation expenses)
II CARRY FORWARD AND SET-OFF (Past losses) (Section 73 and 74)
Unadjusted losses of past years can be carry forward and set-off against current year income subject to certain restrictions;
- Past year losses can be set-off against income from that respective head of income (Inter head adjustment is not possible)
(e. g. Unadjusted loss of HP for the year 2004-05 c/f Rs. 20,000. This loss can be set-off only against HP income of the year 2007-08 and not under any other head)
- The above rule (1) is not applicable to unabsorbed depreciation, which can be set-off against any other head
- All losses (Except loss due to owning and maintaining of race horses) can be carried forward and set-off for 8 subsequent financial years following the Previous Year in which such loss arose.
- Unadjusted loss due to owning and maintaining of race horses can be carried forward and set-off for 4 subsequent financial years following the Previous Year in which such loss arose.
- Unabsorbed depreciation can be carried forward for an unlimited period
Order of Set-off
In case where profits are insufficient to absorb brought forward losses, current depreciation and current business losses, the same should be deducted in the following order
ćCurrent scientific research expenditure [Sec. 35(1)].
ćCurrent depreciation [Sec. 32(1)].
ćBrought forward business losses [Sec. 72(1)].
ćUnabsorbed family planning promotion expenditure [Sec. 36(1)(ix)].
ćUnabsorbed depreciation [Sec. 32(2)].
ćUnabsorbed scientific research capital expenditure [Sec. 35(4)].
ćUnabsorbed development allowance [Sec. 33A(2)(ii)].
ćUnabsorbed investment allowance [Sec. 32A(3)(ii)].
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