UNIT II
Set off and Carry Forward of Losses
Section 70 of the Income Tax Act I.e. Intra-Head Adjustments
Generally, there is no restriction in Income tax Act, 1961 for making any intra-head adjustments in current Year. Exceptions to Intra-Head adjustments are as follows:
- Long-Term Capital Losses can’t be adjusted against Short-Term Capital Gains.
- Losses from Speculation business can’t be set off against normal Business Income.
- Losses from owning & Maintenance Race Horses can’t be set of against Normal Business Income.
- Losses from Specified Business U/s 35AD can’t be adjust against Normal Business Losses.
Important Notes:
i) Losses of Short-Term Capital Assets can be adjusted against both LTCG & STCG.
Ii) Losses from Speculation Business, 35AD Business, Owning & Maintenance race horses can be adjust against income from same nature.
Iii) Further, Normal Business Losses can be adjusted against:
- Income from speculation business
- Income From 35AD Business
- Income from owning & Maintaining Race Horses.
Iv) Losses of Self- Occupied House property can be adjusted against Income from Let-Out Property.
v) Similarly, Losses from one let out property can be set off against Income from other let out Property.
Vi) The Restriction of Rs 2 Lacs is not applying in intra-head adjustments.
Short Examples on Section 70:
i) Short-Term capital Loss of Rs 1 Lacs can be adjusted against Long-Term Capital Gains of Rs 1,50,000. Total Income under the head Capital Gains = Rs 50,000/- (LTCG)
Ii) Long-Term Capital Loss of Rs 1 Lacs can be adjusted against Long-Term Capital gains of Rs 1,20,000. Total Income from Capital gains = Rs 20,000/- (LTCG)
Iii) Long-Term Capital Loss of Rs 1 Lacs can’t be adjusted against Short-Term Capital Gains of 1,40,000. Income under the head Capital Gains = Rs 1,40,000 (STCG) & Rs 1 Lacs Losses of Long-Term which will be carried forward.
Iv) Normal Business Loss of Rs 6 Lacs can be adjusted against Speculation Income of Rs 8 Lacs. Income under the head Business = Rs 2 Lacs which is speculation Income.
v) Normal Business Loss of Rs 5 Lacs can be adjusted against Section 35AD Income of Rs 4 Lacs. Net Result of PGBP head will be losses of Rs 1 Lac which will be adjusted against other heads of Income.
Section 71 i.e. Intra-Head Adjustments:
i) Generally, there is no restrictions of setting of Losses from one head with Income from other heads. Exception to this rule is also there in Section 71.
Ii) Where the net result of any head of Income is loss & such loss represent the:
- Losses from Specified Business
- Losses from Speculation Business
- Losses from Owning & maintenance Race Horse
- Loss from Capital Gains whether it is Short-Term Capital Losses or Long-Term Capital Loss
Then these losses will not allow to set off against Income from any other heads at any cost.
Iii) Where net result of Income under the head PGBP is losses such loss can’t be adjusted against Salary Income at any cost.
Iv) Where Net Result of House Property head is Losses such loss can be set off against any other head only to the extent of Rs 2 Lacs. Balance Losses if any, shall be carried forward to next Assessment Year.
v) However, Losses from other heads of Income (Except capital Gains) can be set off against House Property Income without any restrictions. For Example: Losses from Normal business Rs 10 Lacs can be adjusted against house Property Income of Rs 8 Lacs.
Illustration:
Losses from Speculation Business A – (Rs 8 Lacs)
Income from Speculation Business B – Rs 4 Lacs
Income from House Property – Rs 3 Lacs
Ans: Losses from One speculation business can be adjusted against other Speculation Income. No Restriction at all. Therefore, net result of Business head is losses of Rs 4 Lacs which represent Loss of speculation Business. This loss can’t be adjusted against House Property Income of Rs 3 Lacs.
However, if Business A is normal one then net Result of business head will be loss of Rs 4 Lacs which represent normal business loss. Such loss can be adjusted against House Property Income.
Section 71B: Carry-Forward of House Property Losses
Losses under the house property shall be carried forward to 8 Assessment year & can be adjusted against Income under House Property without any monetary Restrictions.
For Example: Losses under the head House Property is Rs 6 Lacs in AY 2019-20. Income from Capital Gains in AY 2019-20 is Rs 3 Lacs. As per Section 71 Losses of Rs 2 Lacs can be adjusted against Capital Gains income & Balance losses of Rs 4 Lacs shall be carried forward to Assessment Year 2020-21.
In Assessment Year 2020-21, it can be adjusted against Income from house property without any monetary restriction of Rs 2 Lacs.
In such a way, Losses shall be adjusted upto AY 2027-28 i.e. from AY 2020-21 to AY 2027-28.
Even he is not the owner of house property in respect of which loss is incurred he can carry forward the losses.
Carry Forward and Set off of Business Losses other than Speculation Loss (Section 72)
Where the loss under the head 'profits and gains of business or profession' other than loss from speculation business and loss from specified business, could not be set off in the same assessment year because either the assessee had no income under any other head or the income was less than the loss, such loss which could not be set off in the same assessment year, can be carried forward to the following assessment years and it shall be set off against the profit and gains of business or profession subject to the following conditions:
1. Loss can be Set Off only against Business Income :
The following points should be noted:
(A). Loss Can be set off only against Business Income -
A loss under the head, “Profits and gains of business or profession” can be set off against profits of any business1 in the subsequent year. For this purpose, business profits would also include profits derived from a business activity but assessable under a head other than “Profits and gains of business or profession”.
For instance, where shares are held by an assessee as a part of his trading assets, dividend from a foreign company on such shares would form part of business income and, consequently, he will be entitled to claim set off of business loss brought forward from earlier years against dividend of the current year.
(B). Loss Can be set off against any other Business (Not necessarily the same Business) -
It is not necessary that business loss of year 1 should be set off against income from the same business in year 2. In other words, loss of Business A of year 1 can be set off against profit of business A or some other business in year 2.
(C). Set Off of Losses from a Specified Business -
Brought forward loss of a business referred to in section 35AD can be set off in a subsequent year only against income from the business referred to in section 35AD.
Carry Forward and Set off of Speculation Loss (Section 73)
The loss of a speculation business of any assessment year is allowed to be set off only against the profits and gains of another speculation business in the same assessment year.
But, if a speculation loss could not be set off from the income of another speculation business in the same assessment year, it is allowed to be carried forward to be claimed as a set off in the subsequent year, but only against the income of any speculation business. Such loss is allowed to be carried forward for 4 assessment years immediately succeeding the assessment year for which the loss was first computed. It may be observed that it is not necessary that the same speculation business must continue in the assessment year in which the loss is set off. As already discussed, filing of return before the due date is necessary for carry forward of such loss.
1. (Explanation to Section 73) : Companies carrying on Business of Buying and Selling Shares -
This provision is applicable if the following conditions are satisfied—
- Taxpayer is a company.
- It is not a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”. Alternatively, it is a company whose principal business is other than that of trading in shares or banking or the granting of loans and advances.
- The business of the company consists of the purchase and sale of shares of other companies.
- If the above conditions are satisfied, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase/sale of such shares. This rule is applicable even if there is no avoidance of tax by the assessee.
This Explanation shall not apply to the following companies:
- Investment companies i.e. a company whose gross total income consists mainly of income chargeable under the heads 'Income from House Property', 'Capital Gains' and 'Income from Other Sources'.
- A company whose principal business is of banking or granting of loans/advances.
- A company the principal business of which is the business of trading in shares.
It may be noted that the above Explanation applies only to a company. It does not apply to an individual, HUF, Firm, AOP, etc. Further, this Explanation only covers transaction of sale and purchase of shares. Debentures, units of Unit Trust of India or units of Mutual Funds are not covered by this Explanation.
Thus Explanation to section 73 is not applicable if—
- Shares are purchased by the company as investment and not as stock-in-trade; or
- a company the principal business of which is the business of trading in shares.
Speculative Loss can be Set Off only against Speculative Income (Section 73)
Loss in a speculation business can be carried forward to the subsequent year and set off only against the profits of a speculation business carried on in that year.
Such loss can be carried forward for 4 assessment years, immediately succeeding the assessment year for which the loss was first computed.
It is not necessary that the speculation business in which the loss was incurred should continue to be carried on in the subsequent year in which the assessee wants to set off of the loss but the assessee should be the same.
Return of Loss should be Submitted in Time (Section 80) for Carry Forward and Set Off of Speculation Loss
The following losses cannot be carried forward unless the return of income (for the year in which the loss is incurred) is submitted within the due date [of submission of return as given in section 139(1)].
- Loss of a speculative or non-speculative business (not being unabsorbed depreciation etc.,;
- Short or long-term capital loss; and
- Loss (not being unabsorbed depreciation etc., from the activity of owning and maintaining race horses.
The delay in submission of return of loss may be condoned if a few conditions are satisfied. CBDT has power under section 119(2) to condone delay in case of a return which is filed late and where a claim for carry forward of losses is made.
Other Points towards Carry Forward and Set Off of Speculation Loss
- Loss incurred in speculative business in banned items cannot be carried forward to the next year.
- Loss in a speculative transaction entered into on behalf of principal, is non-speculative loss of agent.
- Income from forward transactions entered into on behalf of constituents is not income from speculative business carried on by the assessee.
Carry Forward and Set-Off of Capital Loss under the head 'Capital Gains' (Section 74)
If the net result of the computation under the head “Capital gains” is a loss, the whole of the loss shall be carried forward to the following assessment year as follows—
- Long-term capital loss can be set off only against long-term capital gains.
- Short-term capital loss can be set off against short-term or long-term capital gains.
- Such loss can be carried forward for 8 (eight) assessment years immediately succeeding the assessment year in which the loss was first computed.
- Such loss cannot be carried forward unless return is filed within the time limit of section 139(1)
References:
- Www.taxguru.com
- Income Tax Act with Gist of Supreme Court Rulings Book (Bharat Law House.)
- Income Tax Law & Accounts For B.Com Vth Semester of Calicut University (English, Paperback, Dr. H.C. Mehrotra, Dr. S.P. Goyal)
