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setoff and carry forward of losses under Income tax act

Set-Off and Carry Forward of Losses: Summary of Set-Off Rules

Jun 10, 2022

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Set-Off and Carry Forward Rules under the Income Tax Act, 1961

In simple terms, Set-Off and Carry Forward of losses means adjusting losses against the profit or income of that year and where losses that are not set off against the income (which is in the same year) will be carried forward to the next year against the income of that year. 

A set-off could be intra-head Set-off and Inter-head Set off. The former means that the loss from one source of income is set off against the income from the other source under the same head of income. Whereas Inter-head set off states that when the intra-head is adjusted the taxpayer will be set off remaining losses which are against income from the other heads. 

For example,

Intra-head: Loss from Business A can be set off against profit from Business B, where Business A is one source and Business B is another source and the common head of income is “Business”. 

Inter-head: Loss from house property can be set off against salary income.

Some of the few instances which come under an inter-head are:

  • Loss from House property can be set off against income under any head
  • Business loss other than the speculative business can be set off against any head of income except income from salary.

The meaning of carry-forward loss is that there are times when there are still unadjusted losses which can be even after making the appropriate and permissible adjustments. The adjusted losses will be carried forward to the future year for income adjustments of these years. This rule slightly differs for income under different heads. 

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Set-Off of Current Year Losses

This section explains the Set-Off and Carry Forward rules related to Current Year Losses. The types of business which lies under the head “Profits and Gains from Business and Profession” are as follows:

  1. Speculative Business: This type of business comprises speculative transactions which mean transactions that are in the contract for purchase or sales of any commodity (including stocks & shares) periodically or settled otherwise by actual delivery or transfer of the commodity or script.
  2. Non- Speculative Business: The business which is not into speculative business (which means all the business other than speculative) 
  3. Specified Business: It comprises of business that is under Income Tax Act Section 35D

The table below will clarify the information in detail with respect to Intra Head Set-off of Current year losses

Loss from: To be set off against the profit of: Whether such set-off allowed or not?
Speculative Business Non Speculative Business No
Speculative Business Specified Business No
Non Speculative Business Speculative Business Yes
Non Speculative Business Specified Business No
Specified Business Speculative Business No
Specified Business Non Speculative Business No

 

The below table will clarify the information in detail with respect to Inter Head Set-off of Current year losses

Loss from: To be set off against the profit of: Whether such set-off allowed or not?
Speculative Business Other than business income No
Non Speculative Business Other than business income Yes (except Salary)
Specified Business Other than business income No

 

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Carry forward of Business Losses for Subsequent Years

  1. Losses from House Property
  • It can be carried forward up to the next 8 assessment years right from the assessment year in which the loss happened.
  • Income is adjusted only against Income which is from the house property
  • It can be carried forward in case the return of income for the loss year is belatedly filed.
  1. Losses from Non-speculative Business (Regular Business) Loss
  • It can be taken into consideration to the next 8 assessment years right from the assessment year the loss incurred.
  • It can be only adjusted against the income which is from business or profession.
  • It is not necessary to continue with the business at the time which is set off in future years
  • It cannot be taken forward if the return is not filed within the due date.
  1. Speculative Business Loss
  • It can be carried forward up to the next 4 assessment years from the assessment year in which the loss was incurred.
  • Against the income from the speculative business, it can be adjusted
  • The return should be filed within the due year otherwise it won’t be carried forward.
  • It is not important to continue with the business at the time of set off in future years
  1. Specified Business Loss under 35AD
  • There is no time limit to carry forward the losses under this.
  • It is not urgent or necessary to continue the business at the time of set off in future years
  • It cannot be carried forward in case the return is not filed within the original due date.
  • It can be adjusted with respect to the income from the specified business.
  1. Capital Losses
  • It can be taken into consideration up to the next 8 assessment years from the year where the loss was observed.
  • The long-term capital losses are adjusted only against the long-term capital gains. Similar to the case of short-term losses.
  • It cannot be carried forward in case of the return is not filed within the original due date.
  1. Losses from owning and maintaining race-horses
  • It can be taken into consideration for the next 4 assessment years from the year in which the loss happened.
  • It can be carried forward in case of the return is not filed within the original due date.
  • It can only be set off against the income which is from owing and maintaining race-houses only.

 

Section Losses to be carried forward Can be set off against Income Time up to which losses can be carried forward Mandatory to file return in the year of loss
32(2) Unabsorbed depreciation Any income (other than salary) No time limit No
71B Loss from House property Income from house property 8 years No
72 Loss from Normal business Income from business 8 years Yes
73 Loss from speculative business Income from speculative business 4 years Yes
73A Loss from specified business Income from specified business No time limit Yes
74 Short term capital loss (STCL) Short term capital gain (STCG) and long term capital gain (LTCG) 8 years Yes
Long term capital loss (LTCL) LTCG 8 years Yes
74A Loss from owning and maintaining horse races Income from owning and maintaining horse races 4 years Yes

 

Set off and carry forward rules for losses

Priority for Set-Off and Carry Forward

  • Current year Depreciation, Current year Scientific Research Capital Expenditure, Current year Family Planning Capital Expenditure
  • Brought forward Business Loss
  • Brought forward Depreciation, Brought forward Scientific Research Capital Expenditure, Brought forward Family Planning Capital Expenditure

Same Assessee

The most important condition for any allowance to Set-Off and Carry Forward of losses is that the assessee who has incurred the loss and the one who claims to carry forward and set off should be the same.

The various cases when the business of the assessee happens to be succeeded by another assessee are as follows:

 

The assessee who incurred the loss The assessee who claims the carry forward Whether set-off shall be allowed or not? Reasons
HUF Erstwhile member(taken over on partition) No Since the assessee has been changed
Partnership Firm Same firm after reconstitution Yes Since even though has been reconstituted, the assessee has not been changed
Firm ABC(one of the partners is Mr. A ) Firm XYZ(one of the partners oF Mr. A) No Even though the succeeded firm has one its same partner, since the firm has changed, the assessee has also been changed
Proprietorship One Person Company No Since the assessee has been changed
Proprietorship(Mr. A) Another Proprietorship(Mr. A) Yes Since the assessee has not been changed being Mr. A
Amalgamating Company Amalgamated Company No Since the assessee has been changed

 

One should take a note that in the last case of amalgamation given the condition that amalgamation is of the nature which is specified in the Section 72A, then the depreciation & losses of the amalgamating company can be deemed to be bear the losses and depreciation of the amalgamating company which is of the previous year in which the amalgamation has taken place.

In brief, Section 72A is been duly complied with in an amalgamation case if the Set-Off and Carry Forward of losses is allowed to the succeeding assessee.

Some of the exceptional cases with the above condition are:

  • Heritance:  When the business of the assessee has been succeeded with the inheritance, then the succeeded assessee will be allowed to Set-Off and Carry Forward the losses of such business.

It should be taken into consideration that such type of exception is there only for the losses and not for the unabsorbed depreciation

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