Aggregation of Income, Set-Off and Carry Forward of Losses
In certain cases, some amounts are deemed as income in the hands of the assessee though they are actually not in the nature of income. These cases are contained in sections 68, 69, 69A, 69B, 69C and 69D. The Assessing Officer may require the assessee to furnish explanation in such cases. If the assessee does not offer any explanation or the explanation offered by the assessee is not satisfactory, the amounts referred to in these sections would be deemed to be the income of the assessee. Such amounts have to be aggregated with the assessee’s income.
Specific provisions have been made in the Income-tax Act, 1961 for the set-off and carry forward of losses. In simple words, “Set-off” means adjustment of losses against the profits from another source/head of income in the same assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits, then such losses are carried forward to the next assessment year for adjustment against the eligible profits of that year. The maximum period for which different losses can be carried forward for set-off has been provided in the Act.
(i) Inter-source set-off of losses: Under this section, the losses 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.
Example : Loss from one house property can be set off against the income from another house property.
Example : Loss from one business, say textiles, can be set off against income from any other business, say printing, in the same year as both these sources of income fall under one head of income. Therefore, the loss in one business may be set-off against the profits from another business in the same year.
(ii) Impermissible inter-source set-off: Inter-source set-off, however, is not permissible in the following cases -
Short-term capital loss is allowed to be set off against both short-term capital gain and long-term capital gain. However, long-term capital loss can be set-off only against long-term capital gain and not against short- term capital gain.
A loss in speculation business can be set-off only against the profits of any other speculation business and not against any other business or professional income.
However, losses from other business can be adjusted against profits from speculation business.
Such loss can be set-off only against income from the activity of owning and maintaining race horses.
In case of an assessee exercising the option of shifting out of the default tax regime provided under section 115BAC(1A), loss in any specified business referred in section 35AD can be set-off only against any other specified business.
However, losses from other business can be set-off against profits from specified business.
Loss from an exempt source cannot be set-off against income from a taxable source of income.
Loss under one head of income can be adjusted or set off against income under another head. However, the following points should be considered:
(i) Loss under any head other than capital gains: Where the net result of the computation under any head of income (other than “Capital Gains”) is a loss, the assessee can set-off such loss against his income assessable for that assessment year under any other head, including “Capital Gains”.
(ii) Loss under the head “Profits and gains from business or profession”: Where the net result of the computation under the head “Profits and gains of business or profession” is a loss, such loss cannot be set off against income under the head “Salaries”. It shall be allowed to set off from income under any other head except “Salaries”.
(iii) Loss under the head “Capital Gains”: Where the net result of computation under the head ‘Capital Gains’ is a loss, whether short term or long term, such capital loss cannot be set-off against income under any other head.
(iv) Loss under the head “Income from house property”: The loss under the head “Income from house property” would not be allowable to be set-off against income under the other head if the assessee pays tax at concessional rate u/s 115BAC.
However, if the assessee exercises the option of shifting out of the default tax regime provided under section 115BAC(1A) and there is a loss under the head “Income from house property” and the assessee has income assessable under any other head of income, the maximum loss from house property which can be set-off against income from any other head is ₹ 2 lakhs. In other words, in such case, the amount of such loss exceeding ₹2 lakhs would not be allowable to be set-off against income under the other head.
(v) Speculation loss and loss from the activity of owning and maintaining race horses cannot be set off against income under any other head.
(vi) Losses from Specified business u/s 35AD: In case of an assessee exercising the option of shifting out of the default tax regime provided under section 115BAC(1A), loss from specified business referred to in section 35AD can be set off only against income from any other specified Such loss cannot be set off against income under any other head.
If the income from a source is exempt from tax, loss from that exempt source cannot be set off against taxable income from a different source or taxable income under a different head.
(ii) Maximum period for carry forward & set-off of losses:
Once a particular loss is carried forward, it can be set off only against the income from the same head in the forthcoming assessment years.
Under the Act, the assessee has the right to carry forward the loss from business and profession 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.
The assessee’s right to carry forward business losses under this section is, however, subject to the following conditions:
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”.
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”.
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. Loss from the activity of trading in derivatives, however, is not to be treated as speculative loss.
However, this deeming provision does not apply to the following companies –
Thus, these companies would be exempted from the operation of this Explanation. Accordingly, if these companies carry on the business of purchase and sale of shares of other companies, they would not be deemed to be carrying on speculation business.
Under the optional tax regime, the loss of an assessee claiming deduction under section 35AD in respect of a specified business can be set-off against the profit of another specified business under section 73A,
irrespective of whether the latter is eligible for deduction under section 35AD. An assessee can, therefore, set-off the losses of a hospital or hotel which begins to operate after 1st April, 2010 and which is eligible for deduction under section 35AD, against the profits of the existing business of operating a hospital (with atleast 100 beds for patients) or a hotel (of two-star or above category), even if the latter is not eligible for deduction under section 35AD.
Carry forward & set-off of losses: 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:
Long-term capital gain exceeding ₹ 1,00,000 arising on sale of equity shares or units of equity oriented fund or unit of business trust on which STT is paid
is taxable under section 112A@10%. Long-term capital loss on sale of such shares/units can, therefore, be set-off and carried forward for set-off against long- term capital gains by virtue of section 70(3) and section 74.
|
Term |
Meaning |
|
Amount of loss incurred by the assessee in the activity of owning and maintaining racehorses |
(i) In case assessee has no income by way of stake money – Amount of revenue expenditure incurred by the assessee wholly & exclusively for the purpose of maintaining race horses. (ii) In case assessee has income by way of stake money - The amount by which such income by way of stake money falls short of the amount of revenue expenditure incurred by the assessee wholly & exclusively for the purpose of maintaining race horses. i.e., Loss = Stake money – revenue expenditure for the purpose of maintaining race horses. |
|
Horse race |
A horse race upon which wagering or betting maybe lawfully made. |
|
Income by way of stake money |
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 anyone or more of the horses winning or being placed second or in any lower position in horse races. |
As per the provisions of section 72(2), brought forward business loss is to be set- off before setting off unabsorbed depreciation. Therefore, the order in which set- off will be effected is as follows -
As per section 80,
which has not been determined in pursuance of a return filed under section 139(3) can not be carried forward and set-off. Thus, the assessee must have filed a return of loss under section 139(3) in order to carry forward and set off of such losses. Such a return of loss should be filed within the time allowed under section 139(1).
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).
Ruchika Saboo
An All India Ranker (AIR 7 - CA Finals, AIR 43 - CA Inter), she is one of those teachers who just loved studying as a student. Aims to bring the same drive in her students.
Ruchika Ma'am has been a meritorious student throughout her student life. She is one of those who did not study from exam point of view or out of fear but because of the fact that she JUST LOVED STUDYING. When she says - love what you study, it has a deeper meaning.
She believes - "When you study, you get wise, you obtain knowledge. A knowledge that helps you in real life, in solving problems, finding opportunities. Implement what you study". She has a huge affinity for the Law Subject in particular and always encourages student to - "STUDY FROM THE BARE ACT, MAKE YOUR OWN INTERPRETATIONS". A rare practice that you will find in her video lectures as well.
She specializes in theory subjects - Law and Auditing.
Yashvardhan Saboo
A Story teller, passionate for simplifying complexities, techie. Perfectionist by heart, he is the founder of - Konceptca.
Yash Sir (As students call him fondly) is not a teacher per se. He is a story teller who specializes in simplifying things, connecting the dots and building a story behind everything he teaches. A firm believer of Real Teaching, according to him - "Real Teaching is not teaching standard methods but giving the power to students to develop his own methods".
He cleared his CA Finals in May 2011 and has been into teaching since. He started teaching CA, CS, 11th, 12th, B.Com, M.Com students in an offline mode until 2016 when Konceptca was launched. One of the pioneers in Online Education, he believes in providing a learning experience which is NEAT, SMOOTH and AFFORDABLE.
He specializes in practical subjects – Accounting, Costing, Taxation, Financial Management. With over 12 years of teaching experience (Online as well as Offline), he SURELY KNOWS IT ALL.
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