Set off and Carry Forward of Losses under Income Tax
One of the very interesting and confusing topic of Income Tax is related to Set off of Losses and the carry forward of Losses under different heads of Income.
Many a times, taxpayer suffers losses under various heads of Income and wonders whether he/she will be allowed to set off this loss under other head of income or whether the same will be allowed to be carried forward since the income for particular year is not enough to adjust the same during the year.
Here we will look at different provisions of Income Tax Act relating to set off & carry forward of losses.
1. Set Off of Losses (Intra-head and Inter-head during same year)
Set off of loss from one source against income from another source under the same head of income.
70. (1) Save as otherwise provided in this Act, 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.
(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.
(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.
As per the above provision, any loss under a particular head of income can be set off against any income under the same head i.e. Business loss from one business can be set off against income from another business, house property loss from one property can be set off against income from another house property.
However, in case of Capital Gain this provision is not applicable i.e. Short Term capital gain can be adjusted against Short Term capital gain only and Long Term Capital Gain can be adjusted against Long Term Capital Gain only. They can not be adjusted with each other.
Set off of loss from one head against income from another.
71. (1) 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 no income under the head "Capital gains", he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.
(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).
(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), 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.
(3) Where in respect of any assessment year, the net result of the computation under the head "Capital gains" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.
(3A) Notwithstanding anything contained in sub-section (1) or sub-section (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 two lakh rupees, against income under the other head.
(4) Where the net result of the computation under the head "Income from house property" is a loss, in respect of the assessment years commencing on the 1st day of April, 1995 and the 1st day of April, 1996, such loss shall be first set off under sub-sections (1) and (2) and thereafter the loss referred to in section 71A shall be set off in the relevant assessment year in accordance with the provisions of that section.
Having understood the intra-head adjustment of losses, we now look at inter-head adjustment of losses under Income Tax.
From the above provisions, it can be inferred that :
(1) Loss under any head of Income (other than Capital Gains) can be set off against income from any other head including Capital Gains.
(2) The Business Loss can not be set off against Income from Salaries.
(3) Loss under head Capital Gains (whether Short Term or Long Term) can not be set off against loss under any other head of Income.
(4) In case of House Property Loss, the same can not be adjusted more than Rs.200000/- during a year i.e. House Property loss of more than Rs.200000/- can not be set off against any other head of Income.
Carry Forward of Losses
Carry forward and set off of business losses.
72. (1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—
(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ;
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :
Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, reconstructed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and—
(a) it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year; and
(b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding.
(2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section.
(3) No loss (other than the loss referred to in the proviso to sub-section (1) of this section) shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.
From the above provision relating to carry forward of losses, it can be inferred that :
1. The Business loss which could not be set off during a particular year can be carried forward to next year and can be adjusted till eight years from the end of the relevant asstt. year in which the loss was incurred.
2. The loss from Speculation business can not be set off with normal business loss. It can be adjusted with Speculation profit only.
3. In case of depreciation loss being carried forward, first the business loss will be adjusted.
Losses in speculation business.
73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—
(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed.
Explanation.—Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
According to above provision, the speculation loss can not be set off against any other loss whether it is business loss or any other loss. The same can be set off against speculation profit only. If any loss remains in respect of speculation loss during the year, the same may be carried forward up to next eight assessment years and can be set off against speculation profit only.
Losses under the head "Capital gains".
74. (1) Where in respect of any assessment year, the net result of the computation under the head "Capital gains" is a loss to the assessee, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—
(a) in so far as such loss relates to a short-term capital asset, it shall be set off against income, if any, under the head "Capital gains" assessable for that assessment year in respect of any other capital asset;
(b) in so far as such loss relates to a long-term capital asset, it shall be set off against income, if any, under the head "Capital gains" assessable for that assessment year in respect of any other capital asset not being a short-term capital asset;
(c) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
(2) No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.
The provisions relating to carry forward of capital loss is :
(a) In case of Short term capital loss being carried forward, the same may be adjusted against any profit under the head Capital Gain i.e. short term or long term.
(b) In case of Long Term Capital loss being carried forward, the same may be adjusted against profit from Long Term capital gains only during next years.
(c) The losses under head Capital Gains can be carried forward till the end of eight assessment years following the assessment year in which the loss took place.