Carry Forward and Set Off of Losses
Income under the Income Tax Act is taxable under five heads:
1. Income from salaries
2. Income from house property
3. Income from business or profession
4. Income from capital gains
5. Income from other sources
It is possible for an individual to have income under more than one head. The Income Tax Act has prescribed rules to set-off loss arising from one head against other heads of income. The process of setting off of losses and their carry forward can be dividing in following steps:
# Inter source Adjusment under the same head of income
# Inter head adjustment in the assessment year
# Carry forward of a loss.
Inter source Adjusment under the same head of income
Where the net result for any assessment year in respect of any source 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 inter source adjustment.
Inter head adjustment in the assessment year
As explained above, any loss from one source of income is firstly set off against any gain from another source within the same head. Any remaining loss can then be set off against Income from any other Head. This is known as Inter-Head adjustment
Carry forward of a loss.
If the losses could not be set off under the same head or under different heads in the ame assessment year, such losses are allowed to be carried forward to be claimed as set off from the income of the subsequent assessment years.
# Loss under the head ”income from house property”
# Loss under the head “profits and gains of business of profession”
# Loss under the head “capital gain”
# Loss from the activity of owning and maintain race horses
1.2 STATEMENT OF PROBLEM / RESEARCH QUESTION
Most of the time general people set off their losses in the same assessment year and they don’t have the idea of carry forwarding of losses or any such concept. Mostly they don’t have any detail knowledge of law. Sometime it also happen that people show on their losses and take the benefit at large of this provision and make a good amount of money without paying any tax.
The objective of this project is:
To study the method of carry forward the losses
To study the limitation of carry forward of losses
The researcher has made certain assumption in the beginning of the research project which are going to be tested during the project, they are
When losses can set of in either of first two conditions then carry forward of loss cannot be done.
1.5 SCOPE OF THE STUDY
The research is a doctrinal research. The researcher here would like to study though the judicial viewpoints by its decision given in various cases. The researcher has tried to analysis the topic by studying various authors, experts, cases of The Indian Apex Court and High courts, articles, etc. The researcher has strictly followed the boundary and has studied only with reference to Indian authors, experts, cases, etc.
The present research study is mainly a doctrinal and analytical. Keeping this in view, the researcher has gone through different books, journals, Web references, E-journal, reports etc.
The relevant material is collected from the secondary sources. Materials and information are collected both legal sources like books.
As we know there are three steps for set off and carry forward of loss its necessary to follow the sequence for the same.
2.1 Inter source adjustment
Any loss incurred by the assessee in respect of one source shall be set off against income from any other source under the same head of income, since the income under each head is to be computed by grouping together the net result of the activities of all the sources covered by that head. In simpler terms, loss from one source of income can be adjusted against income from another source, both the sources being under the same head.
1. Loss from speculation business.
2. Long term capital loss w.e.f AY 2004.
3. Loss from specified business.
4. Loss from activity of owning and maintaining race horses.
5. No loss can be set off against gains from winning from lotteries, crosswords, puzzles, card games or other gambling.
2.2 Intra head set off
According to section 71, if there is a net result of loss in respect of any head of income during any assessment year the loss can be set off against the income of any other head of income.
1. Loss from speculation business.
2. Losses under head capital gains.
3. Losses from the business of owning and maintaining of race horses.
4. Loss from business/profession cannot be set of against income under head salaries (2005-06).
5. Loss from exempt income (loss of profit must be loss of taxable profit).
6. No loss can be set off against gains from winning from lotteries, crosswords, puzzles, card games or other gambling (section 58(4)).
2.3 CARRY FORWARD AND SET OFF OF LOSSES.
If a loss cannot be set off either under the same head or under the different heads due to absence /adequacy of the income during the same year, such loss may be carried forward to the next year to be set off against the income of that year.
In the present context the losses can be carried forward to be set off against the income other subsequent year is possible in the following heads of income:-
1. Loss from house property.
2. Loss from business and profession:-
a) Loss from non speculation business.
b) Loss from speculation business.
c) Loss on account of depreciation, Capital Expenditure on Scientific Research and Family Planning.
3. Loss on account of capital gain:-
a) Loss on account of short term capital gain.
b) Loss on account of long term capital gain.
4. Loss from other sources:-
a) Only from the activity of owning and maintaining race horses.
Set off and carry forward of loss
3.1 House Property
(i) In any assessment year, if there is a loss under the head ‘Income from house property’, such loss will first be set-off against income from any other head during the same year.
(ii) If such loss cannot be so set-off, wholly or partly, the unabsorbed loss will be carried forward to the following assessment year to be set-off against income under the head ‘Income from house property’.
(iii) The loss under this head is allowed to be carried forward upto 8 assessment years immediately succeeding the assessment year in which the loss was first computed.
For example, loss from one house property can be adjusted against the profits from another house property in the same assessment year. Any loss under the head ‘Income from house property’ can be set off against any income under any other head in the same assessment year. However, if after such set off, there is still any loss under the head “Income from house property”, then the same shall be carried forward to the next year.
3.2 Business Losses
Under the Act, the assessee has the right to carry forward the loss in cases where such loss cannot be set-off due to the absence or inadequacy of income under any other head in the same year. The loss so carried forward can be set-off against the profits of subsequent previous years.
Section 72 covers the carry forward and set-off of losses arising from a business or profession.
(i) The loss should have been incurred in business or profession.
(ii) The loss should not be in the nature of a loss in the business of speculation.
(iii) The loss may be carried forward and set-off against the income from business or profession though not necessarily against the profits and gains of the same business or profession in which the loss was incurred. However, a loss carried forward cannot, under any circumstances, be set-off against the income from any head other than “Profits and gains of business or profession”.
(iv) The loss can be carried forward and set off only against the profits of the assessee who incurred the loss. That is, only the person who has incurred the loss is entitled to carry forward or set off the same. Consequently, the successor of a business cannot carry forward or set off the losses of his predecessor except in the case of succession by inheritance.
(v) A business loss can be carried forward for a maximum period of 8 assessment years immediately succeeding the assessment year in which the loss was incurred.
(vi) The assessee must have filed a return of loss under section 139(3) in order to carry forward and set off a loss. In other words, the non-filing of a return of loss disentitles the assessee from carrying forward the loss sustained by him. Such a return should be filed within the time allowed under section 139(1). However, this condition does not apply to a loss from house property carried forward under section 71B and unabsorbed depreciation carried forward under section 32(2).
3.3 Losses in Speculation Business
(i) The meaning of the expression ‘speculative transaction’ as defined in section 43(5) and the treatment of income from speculation business has already been discussed under the head “Profits and gains of business or profession”.
(ii) Since speculation is deemed to be a business distinct and separate from any other business carried on by the assessee, the losses incurred in speculation can be neither set off in the same year against any other non-speculation income nor be carried forward and set off against other income in the subsequent years.
(iii) Therefore, if the losses sustained by an assessee in a speculation business cannot be set-off in the same year against any other speculation profit, they can be carried forward to subsequent years and set-off only against income from any speculation business carried on by the assessee.
(iv) The loss in speculation business can be carried forward only for a maximum period of 4 years from the end of the relevant assessment year in respect of which the loss was computed. Loss from the activity of trading in derivatives, however, is not to be treated as speculative loss.
3.4 Specified Businesses
(i) Any loss computed in respect of the specified business referred to in section 35AD shall be set off only against profits and gains, if any, of any other specified business.
(ii) The unabsorbed loss, if any, will be carried forward for set off against profits and gains of any specified business in the following assessment year and so on.
(iii) There is no time limit specified for carry forward and set-off and therefore, such loss can be carried forward indefinitely for set-off against income from specified business.
3.5 Capital Gains
Section 74 provides that where for any assessment year, the net result under the head ‘Capital gains’ is short term capital loss or long term capital loss, the loss shall be carried forward to the following assessment year to be set off in the following manner:
(i) Where the loss so carried forward is a short term capital loss, it shall be set off against any capital gains, short term or long term, arising in that year.
(ii) Where the loss so carried forward is a long term capital loss, it shall be set off only against long term capital gain arising in that year.
(iii) Net loss under the head capital gains cannot be set off against income under any other head.
(iv) Any unabsorbed loss shall be carried forward to the following assessment year up to a maximum of 8 assessment years immediately succeeding the assessment year for which the loss was first computed.
3.6 Owning and Maintaining Race Horses
(i) According to provisions of section 74A(3), the losses incurred by an assessee from the activity of owning and maintaining race horses cannot be set-off against the income from any other source other than the activity of owning and maintaining race horses.
(ii) Such loss can be carried forward for a maximum period of 4 assessment years for being set-off against the income from the activity of owning and maintaining race horses in the subsequent years.
(iii) For this purpose, the “amount of loss incurred by the assessee in the activity of owning and maintaining race horses” means the amount by which such income by way of stake money falls short of the amount of revenue expenditure incurred by the assessee for the purpose of maintaining race horses. i.e. Loss = Stake money – revenue expenditure for the purpose of maintaining race horses.
(iv) Further, the expression ‘horse race’ means a horse race upon which wagering or betting may be lawfully made.
(v) “Income by way of stake money” means the gross amount of prize money received on a race horse or race horses by the owner thereof on account of the horse or horses or any one or more of the horses winning or being placed second or in any lower position in horse races.
As we have seen different heads of income and their provision related to set off and carry forward, we can say that loss should be set off inter source in the same AY and if still there is a loss then only inter head set off is allowed. After completing first two steps only if any loss remains then it will be carry forward and will set off in next AY under the same head of income and not different head. But there still exception to it for example Losses in Speculation Business can only be set off against the same head for that particular AY.
Now if take computation’s example then
For Mr. X profit loss
Salary income 1,42,000 NIL
Income from HP
H – A 1,15,000
H – B 1,17,000
H – C 1,21,000
Profit and gain from business and profession
B – A 1,08,000
B – B 1,18,000
B – C (SPECUATIVE) 1,11,000
B – D (SPECUATIVE) 1,23,000
Other Source Income
Income from card game 1,08,000
Loss from card game 1,07,000
Loss on maintenance of race horse 1,06,000
Interest on securities 1,04,000
S 1 inter source adjustment
Income from HP
H – A 1,15,000
H – B -1,17,000
H – C -1,21,000
Business and profession
B – A 1,08,000
B – B -1,18,000
B – C (SPECUATIVE) 1,11,000
B –D (SPECUATIVE) -1,23,000
It Will Be Carry Forward Next Year -12,000
Carry Forward Next Year -9,500
Card Game Loss Not For Set Off
Card Game Gain 1,08,000
Interest On Security 1,04,000
Race Horse Loss To Be Carry Forward
Salary Other Source = 3,54,000
Loss Set Off
Hp Buisness Gain = 1,33,000
Loss Carry Forward
Buisness Gain Cg Race Horse = 1,27,500
Loss Cannot Carry Forward
Loss From Game Of Cards = 1,07,000
Salary – Loss Of Hp = 19,000
Card Game = 1,08,000
Securites = 94,000 (1,04,000 – 10,000)
So, Net Income = 2,21,000
Loss Carry Forward = 1,27,500
# Singhania V. K. & Kapil Direct Taxes 48th Ed. P638
# Ibid p 638
# Ibid p639
# Ibid p 641
# Section 70
# S. 35AD of the Act
# S. 54(4) of the Act
# section 71
# Section 71B
# Sections 72 & 80
# Section 80
# Section 73
# Section 73A
# Section 74
# Section 74A(3)
# Taxmann/IncomeTaxActs/2005ITAct/casesec72.htm" target="_blank"> http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2005ITAct/casesec72.htm
The author can be reached at: email@example.com