Setoff and carryforward losses-Inter head and Intra Head

The losses from one source of income can be set off against income under the same head of income, though sources might be different.Set off and carry forward of losses under the Income Tax Act allows taxpayers to adjust losses against income in the same year or carry them forward to future years, helping to reduce taxable income and tax liability.

1. MEANING OF SET OFF OF LOSSES An assessee may have various sources of income under any head of income but this is not necessary that in a previous year all these sources will generate income only . In fact, there may be a condition in which one or more source of income may generate losses while some other source of income may generate profit or gains under the same head of income. Since assessee is taxed on the net income, such losses are made good (Adjusted) against the gains or profits of other sources. This adjustment of losses is called 'Setting off of Losses'. Similarly, there may be profit under one head of income and loss in another head of income. This loss of one head can also be set off (Adjusted) against the profits/gains of another head .

2. Inter Source Adjustment (Set off) (Section 70) Where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against the income from any other source under the same head. This is called Inter-Source Adjustment. For example, if an assessee has four house properties. Three of them yield net taxable income, but from the fourth there is net loss. The assessee can set-off the loss of one Aggregation of Incomes (Clubbing of Incomes and Deemed Incomes) and Set Off and Carry Forward of Losses 115 house property against the income of the remaining house properties. Similarly, if an assessee has four businesses of different nature in a particular year, from two businesses there is a taxable profit and from remaining two businesses there is loss. The loss of these two businesses can be set off against the profits of the other two businesses.

3. Exceptions: i ) Speculation Losses can be set off only against profits , if any of another speculation business carried on by the assessee. ii) Loss of Tax free source of income cannot be set off against profits in any other source . For example, agricultural loss cannot be set off against income in any other source iii) Losses from activity of owning and maintaining race horses cannot be set off from any other source of income except under the income of same head. iv) Losses from other businesses will not be allowed to be set off against winnings from races, lotteries, etc. v) Long-term capital loss can only be set off against Long-term capital gain. Short-term capital gain cannot be used for this purpose. vi) Short-term capital loss can be set off from gains of any capital asset. vii) Losses from lottery etc cannot be set off against winning from lotteries, card games etc. viii) Losses of specified business referred in Section 35 AD can only be set off from the income of other specified business.

4. Inter Head Adjustment (Set off) (Section 71) Where in respect of any assessment year the net result of the computation under any head of income is a loss, the assessee shall be entitled to have the amount of such loss, set-off against his income, if any, assessable under any other head of income. However, there are, certain exceptions to this general rule, which are as under

5. Exceptions: i ) Loss in a speculation business cannot be set off against any other income. ii) Loss of a specified business referred in Section 35 AD can only be setoff from the income of other specified business. iii) Income in other heads cannot be utilized in setting off of losses under the head capital gains. iv) Losses arising from the business of owning and maintaining racehorses are not allowed to be set off against any other income. v) Loss from business or profession cannot be set off against incomes under the head 'Salaries'. Income from Capital Gains & Other Sources 116 vi) In any assessment year, loss of income under the head 'Income from house property' can be set-off against income of any other head of income subject to the restriction of Rs. 2 lakhs. vii) Loss from an exempted source of income is not allowed to be set-off against any taxable income. viii)Losses from lotteries, betting, crossword puzzles, gambling etc. cannot be set off either against income under other heads or against income from any other sources under the same head. ix) Any loss from any source is not allowed to be set off against winnings from races, card games, lotteries, bets etc.

6. Set-off of Losses of Speculation Business [Section 73(1)] Losses related to speculation business can be set off only from profits and gains (if any) of another similar business (i.e. speculation business) carried on by the assessee and not against the income of any other head.

7. Set off of Losses under the Head Capital Gains Capital Losses can be (a) Short-term and (b) Long-term. i ) Short-term capital Loss can be set off from any capital Gain i.e. Shortterm gain or Long-term gain. ii) Long-term capital Loss can only be set off against Long-term Capital Gains.

8. Set-off of Losses from Owning and Maintaining Race Horses [Section 74A (3)] The amount of loss incurred by the assessee in the activity of owning and maintaining race horses in any assessment year shall be set off only against the income of the same activity (i.e. owning and maintaining race horses). This type of loss cannot be set off against the income from any other source. Set off of Losses of Lottery, Betting, Gambling, Crossword Puzzles or Card Games, etc These losses are not allowed to be set off against any income including winnings of lotteries, crossword puzzles, races, card games, etc.

9. Accumulated Losses and Unabsorbed Depreciation In addition to business losses (a) unabsorbed depreciation, (b) unabsorbed capital expenditure on scientific research and (c) unabsorbed expenditure on family planning can also be carried forward indefinitely although as per Income Tax Law these are not business losses.

10. These losses can be set off against the income under any head except salaries in the following order: i ) Current year's depreciation [Section 21(1)] ii) Current year capital expenditure on scientific research and current year expenditure on family planning to the extent allowed. iii) Brought forward business or professional losses [Section 71(1)] iv) Unabsorbed depreciation [Section 32(2)] v) Unabsorbed capital expenditure on scientific research [Section 35(4)] vi) Unabsorbed expenditure on family planning [Section 21(1) (9) ] It is necessary that the details of all such losses must be given in the return of income and the return must be filed before due date u/s 139 (1) otherwise the loss cannot be carried forward .

11. Loss of Speculation business [Section 73] Where it is not possible to fully set off losses of speculation business against the profits of another speculation business in the same year then 'Not Set off Losses' can be carried forward for the purpose of setting off such losses from the profits of speculation business. However, such carry forward of 'Not Set off Losses' can be made for a maximum period of 4 assessment years immediately succeeding the assessment year for which the loss was first computed.

12. Losses of Specified Business [Section 73A] According to Section 73 A, for any assessment year if any loss computed in respect of Specified Business has not been wholly set off against any other Specified Business in the same assessment year then 'Not set off' such losses can be carried forward in the following assessment year, and i ) It shall be set off against the profits and gains, if any, of any Specified Business carried on by him assessable for the 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 till it is fully set off out of profits of any Specified Business.

13. Capital Losses [Section 74] a) 'Not Set off' Short Term Capital Loss of a previous year may be carried forward to be set off against the Capital Gains (whether Long-term Capital Gain or Short-term Capital Gain) arising in eight (8) subsequent years immediately succeeding the assessment year for which the loss was first computed. b) 'Not Set off' Long-Term Capital Loss of a previous year may be carried forward to be set off against the Long-Term Capital Gains, arising in subsequent eight (8) years immediately succeeding the assessment year for which the loss was first computed

14. Losses on Account of Owning and Maintaining Race Horses [Section 74A] ' Not Set Off’ Losses from the activity of Owning and Maintaining Race Horses may be carried forward for a maximum 4 assessment years immediately succeeding the assessment year in which such loss was first computed. Such 'Not Set off Losses' can be carried forward but are allowed to be set off from the profits of owning and Maintaining Race Horses only subject to the condition that such activities must have been continued till the losses are carried forward. If such activities related to race horses are discontinued, losses of such discontinued, business cannot be carried forward.

15. Losses of Firms Some main points are given as under: a) The firm can only set off and carry forward and set off its own losses and not the partners. b) Firm's "Not Set Off" business losses can be carried forward for 8 assessment years and set off against business income of subsequent years. Income from Capital Gains & Other Sources 122 c) Unabsorbed Depreciation, Capital Expenditure on Scientific Research and Family Planning are allowed to be carried forward for being set off in the subsequent assessment years and there is no time limit prescribed for such carry forward.

16. Losses of Lottery, Crossword Puzzles, Gambling, Betting etc These losses cannot be carried forward; however, they can be set off in the same year in which they occur against the incomes of the similar sources.

17. Order of Set Off If the assessee is entitled to claim depreciation, capital expenditure, etc and carried forward business losses, the order of set-off will be as under: i ) Current year depreciation [Section 32 (1)] ii) Current year capital expenditure on scientific research and family planning to the extent allowed. iii) Brought forward business or professional losses [Section 72(1)] iv) Unabsorbed Depreciation [Section 32 (2)] v) Unabsorbed Capital expenditure on scientific research [Section 35 (4)] vi) Unabsorbed expenditure on family planning [Section 36 ( i ) (ix)]