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Set off of Loss & Carry Forward of Losses - Taxation

Learning Sections

Section 70	Set off the loss within same head.
Section 71	Set off the loss with different head.
Section 71B to 74A	Set off of past year losses.
Section 80	Losses allowed to be carried forward and set off if return of loss is filed in time.

Introduction

How do you compute Gross Total Income? By adding all five heads of income and making two adjustments. First is clubbing of income and the second is setting off the losses. Let us discuss set off of losses.

Setting off the current year Losses:

1. Section 70. Set off of loss from one source against income from another source under the same head of income. It talks about losses which can be set off under same heads of income. Also known as Inter source adjustment or Intra-head adjustment.

e.g. Suppose Income from first house is Rs 8,000 and loss from second house is Rs 5,000. In this case loss of Rs 5,000 shall be set off with Rs 8,000. Income from House Property shall be Rs 3,000.

2. Section 71. Set off of loss from one head against income from another head. It talks about losses which can be set off with different heads of income. Also known as Inter-head adjustment.
What is the difference between inter source adjustment and inter head adjustment?

e.g. 1: Suppose Income house property is RS 8,000 loss and Income from Salary is RS 15,000. In this case loss of RS 8,000 shall be set off against an income of RS 15,000. Gross Total Income shall be RS 7,000.

e.g. 2: Suppose Loss from house property is RS 8,000 and Income from Salary is RS 2,000. In this case loss of RS 8,000 shall be set off against an income of RS 2,000. Gross Total Income shall be nil. The remaining house property loss of RS 6,000 shall be carried forward to next year.

SETTING OFF THE PAST YEAR LOSSES

Carry forward and adjustment of brought forward losses. (It means adjustment of past year loss with the current year income). Section 71B to 74A. Brought forward losses are to be set off only with same head of income.

Basic Rules for Setting of off the Losses

1. First apply section 70 and then section 71 and lastly adjust brought forward losses (71B to 74A subject to section 80) to arrive at the Gross Total Income.

2. It is mandatory to set off the losses.

3. No loss can be set off against income which is exempt from tax. Similarly loss of exempted income cannot be set off from taxable income. However AI can be set off from each other to compute tax as per partial integration.

Rules to set off of losses & carry forward & set off of losses

As you know there are 5 heads of income but for set off of losses we are creating 7 heads. (This is done only to simplify this chapter). As you know loss cannot arise under the head Income from Salary. Therefore we are left with 4 heads which are further divided into separate heads.

	Section 70 Whether loss can be set off within same head	Section 71 Whether loss can be set off within different head	Section 71B to 74a Whether loss can be can be carried forward
Loss from House Property	Yes	Yes	Yes for 8 AY’s [S 71B]
Business Loss	Yes	Yes (note 1)	Yes for 8 AY’s [S 72]
Speculation loss (note 2)	Yes	No	Yes for 4 AY’s [S 73]
Loss u/h Capital Gain	Yes (note 3)	No	Yes for 8 AY’s [S 74]
Loss from activity of owning & maintaining race horses	Yes	No	Yes for 4 AY’s [S 74A]
Loss from winnings from races, lotteries, crossword puzzles, etc. (note 4)	No	No	No
Other losses	Yes	Yes	No

Note 1: However as per section 71(2A) loss arising under the head ‘business’ is not allowed to be set off with Income from Salary.

Note 2: 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 (cancelled) otherwise than by the actual delivery or transfer of the commodity or scrips. [Section 43(5)]

Note 3: LTCL can be set off only against LTCG but never against STCG. However STCL can be set off both from STCG and LTCG.

Note 4: Also no loss can be set off against the profit from winnings from races, lotteries, crossword puzzles, etc.

P1 : Compute gross total income and amount of loss allowed to be carried forward to next year.

	Case 1	Case 2	Case 3	Case 4
Income from Salary	20,000	20,000	20,000	20,000
Income from House property	(8,000)	7,000	10,000	9,000
Profit from business	(1,000)	(4,000)	(16,000)	(13,000)

Ans: (1) 12,000; 1,000; (2) 23,000; Nil; (3) 20,000; 6,000; (4) 20,000; 4,000.

Hint : As per section 71(2A) loss from business cannot be set off with income from salary, however house property loss can be set off with income from salary. In this case gross total income is Rs 12,000 and Rs 1,000 shall be carried forward to next year. Business loss can be carried forward only when return of loss is filed in time.

P2 : Compute gross total income and amount of loss allowed to be carried forward to next year.

	Case 1	Case 2	Case 3	Case 4
Income from Salary	20,000	20,000	20,000	20,000
Profit from business	(10,000)	40,000	(15,000)	(30,000)
Profit from speculation business	40,000	(10,000)	(16,000)	5,000

Ans: (1) 50,000; Nil (2) 60,000; 10,000; (3) 20,000; 31,000; (4) 20,000; 25,000.

P3 : Compute gross total income and amount of loss allowed to be carried forward to next year.

	Case 1	Case 2	Case 3	Case 4
STCG	(10,000)	40,000	15,000	(2,000)
LTCG on sale of land	40,000	(10,000)	(6,000)	800
LTCG on sale of shares (STT paid)	90,000	(50,000)	(12,000)	95,601
Income from House Property	nil	5,000	(2,000)	500

Ans: (1) 30,000; nil (2) 45,000; 10,000; (3) 13,000; 6,000; (4) 500; 1,200.

P4 : Compute gross total income and amount of loss allowed to be carried forward to next year.

	Case 1	Case 2	Case 3
Profit from activity of owning and maintaining race horses	(10,000)	15,000	(10,000)
Profit from activity of owning and maintaining race camel	40,000	(10,000)	(8,000)

Ans: (1) 40,000; 10,000; (2) 5,000; nil. (3) nil; 18,000

P5 : Compute gross total income and amount of loss allowed to be carried forward to next year.

	Case 1	Case 2	Case 3	Case 4
Profit from business	(10,000)	40,000	15,000	(2,000)
Winning from horse race	40,000	(10,000)	(6,000)	(80,000)
Winning from camel race	4,000	1,000	(600)	50,000
Profit from activity of owning and maintaining race horses	nil	nil	(1,000)	8,000

Ans: (1) 44,000; 10,000; (2) 41,000; nil; (3) 15,000; 1,000; (4) 56,000; nil.

P6 : Compute gross total income and amount of loss allowed to be carried forward to next year.

	Case 1	Case 2	Case 3
Profit from business	(10,000)	40,000	(15,000)
LTCG on sale of land	40,000	(10,000)	(6,000)

Ans: (1) 30,000; nil (2) 40,000; 10,000 (3) nil; 21,000

P8 : Compute Total Income from the following information

Particulars		Source 1	Source 2	Source 3
1.	Income from Salary	30,000	45,000	51,000
2.	Income from House Property	20,000	(10,000)	(30,000)
3.	Speculation Business	25,000	(55,000)	25,000
4.	Non-speculation Business	40,000	(20,000)	(30,000)
5.	STCG on shares (STT paid)	1,000	(2,300)	(4,900)
6.	LTCG on sale of land	500	18,000	(100)
7.	Profit from activity of owning & maintaining race horses	(5,800)	1,400	1,600
8.	Winning from Lotteries	(10,000)	2,000	5,000
9.	Interest on debentures	6,000	(1,500)	(7,000)

First apply section 70 and then section 71 and lastly adjust b.f. losses.

Particulars		70	71	71B to 74A
1.	Income from Salary	30,000 + 45,000 + 51,000	1,26,000	-
2.	Income from House Property	20,000 - 10,000 - 30,000	(20,000)	-
3.	Speculation Business	25,000 - 55,000 + 25,000	-	(5,000)
4.	Non-speculation Business	40,000 - 20,000 - 30,000	(10,000)	-
5.	STCG (STT paid)	1,000 - 2,300 - 4,900 = - 6,200	-	-
6.	LTCG on sale of land	500 + 18,000 - 100 = 18,400	-	-
7.	Capital Gain (LTCG - STCG)	18,400 - 6,200	12,200	-
8.	Profit from activity of owning & maintaining race horses	- 5,800 + 1,400 + 1,600	-	(2,800)
9.	Winning from Lotteries	2,000 + 5,000	7,000	-
10.	Interest on debentures	6,000 - 1,500 - 7,000	(2,500)	-
Gross total Income			1,12,700

P9 :

1. Which are the losses not allowed to be carried forward ?

2. For how many years losses can be carried forward?

3. Which are the losses allowed to be set off with different head ?

4. In case of inter head adjustment which loss should be given the first priority?

5. Examine the statement ‘Loss cannot arise from casual income’.

6. Which are the losses allowed to be carried forward ?

Solution

1. There are only two such losses. Casual losses and other losses.

2. Where the losses are allowed to be carried forward it can be carried forward for a maximum period of 8 years except in case of speculative losses and losses from activity of owning and maintaining horse races where the loss is allowed to be carried forward for 4 assessment years.

3. There are only three such losses. Loss from house property, Non speculation business loss and other losses.

4. Obviously the loss which is not allowed to be carried forward which is ‘other losses’ under the head Income from Other Sources.

5. Expenditure for earning casual income is not allowed as deduction, Deduction u/s 80C to 80U is not allowed, Casual loss is not allowed to be set off from casual income, No other loss can be set off against the casual income. Therefore ‘Loss cannot arise from casual income’.

6. Loss from House Property; Business loss; Capital loss and Loss from activity of owning and maintaining race horses.

The document Set off of Loss & Carry Forward of Losses (Part - 1) - Taxation | Income Tax for assessment (Inter Level) is a part of the Taxation Course Income Tax for assessment (Inter Level).

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FAQs on Set off of Loss & Carry Forward of Losses (Part - 1) - Taxation - Income Tax for assessment (Inter Level)

1. What is the concept of set off of losses in taxation?

Ans. The concept of set off of losses in taxation refers to the provision that allows taxpayers to offset their losses in one source of income against their income from another source. This helps in reducing the overall tax liability of the taxpayer.

2. What is carry forward of losses in taxation?

Ans. Carry forward of losses in taxation refers to the provision that allows taxpayers to carry forward their losses from a particular year to subsequent years and set them off against future profits. This helps in reducing tax liabilities in the future when the taxpayer starts making profits.

3. Can all types of losses be set off and carried forward in taxation?

Ans. No, not all types of losses can be set off and carried forward in taxation. The Income Tax Act specifies certain rules and restrictions regarding the set off and carry forward of losses. For example, capital losses can only be set off against capital gains and cannot be set off against income from other sources.

4. What are the time limits for carrying forward losses in taxation?

Ans. The time limits for carrying forward losses in taxation vary depending on the type of loss. For example, business losses can be carried forward for a period of 8 years from the year in which the loss was incurred. However, the time limit for carry forward of capital losses is 8 years, while the time limit for carry forward of house property losses is unlimited.

5. Are there any restrictions on the utilization of carried forward losses in taxation?

Ans. Yes, there are certain restrictions on the utilization of carried forward losses in taxation. For example, the carried forward losses can only be set off against income of the same nature in future years. Additionally, there are certain limits on the amount of loss that can be set off in a particular year. These restrictions are specified by the Income Tax Act.

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