Set off and Carry Forward of Losses under Income Tax

One of the very interesting and confusing topic of Income Tax is related to Set off of Losses and the carry forward of Losses under different heads of Income. 

Many a times, taxpayer suffers losses under various heads of Income and wonders whether he/she will be allowed to set off this loss under other head of income or whether the same will be allowed to be carried forward since the income for particular year is not enough to adjust the same during the year. 

Here we will look at different provisions of Income Tax Act relating to set off & carry forward of losses. 

1. Set Off of Losses (Intra-head and Inter-head during same year)

Set off of loss from one source against income from another source under the same head of income.

70. (1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than "Capital gains", 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.

 

(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.

 

(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.

As per the above provision, any loss under a particular head of income can be set off against any income under the same head i.e. Business loss from one business can be set off against income from another business, house property loss from one property can be set off against income from another house property. 

However, in case of Capital Gain this provision is not applicable i.e. Short Term capital gain can be adjusted against Short Term capital gain only and Long Term Capital Gain can be adjusted against Long Term Capital Gain only. They can not be adjusted with each other. 

Set off of loss from one head against income from another.

71. (1) Where in respect of any assessment year the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has no income under the head "Capital gains", he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.

(2) Where in respect of any assessment year, the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has income assessable under the head "Capital gains", such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head "Capital gains" (whether relating to short-term capital assets or any other capital assets).

(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss and the assessee has income assessable under the head "Salaries", the assessee shall not be entitled to have such loss set off against such income.

(3) Where in respect of any assessment year, the net result of the computation under the head "Capital gains" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.

(3A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head "Income from house property" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head.

(4) Where the net result of the computation under the head "Income from house property" is a loss, in respect of the assessment years commencing on the 1st day of April, 1995 and the 1st day of April, 1996, such loss shall be first set off under sub-sections (1) and (2) and thereafter the loss referred to in section 71A shall be set off in the relevant assessment year in accordance with the provisions of that section.

Having understood the intra-head adjustment of losses, we now look at inter-head adjustment of losses under Income Tax. 

From the above provisions, it can be inferred that : 

(1) Loss under any head of Income (other than Capital Gains) can be set off against income from any other head including Capital Gains. 

(2) The Business Loss can not be set off against Income from Salaries. 

(3) Loss under head Capital Gains (whether Short Term or Long Term) can not be set off against loss under any other head of Income. 

(4) In case of House Property Loss, the same can not be adjusted more than Rs.200000/- during a year i.e. House Property loss of more than Rs.200000/- can not be set off against any other head of Income. 

Carry Forward of Losses

Carry forward and set off of business losses.

72. (1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

 (i)  it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that 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 :

Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, reconstructed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and—

(a)  it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year; and

(b)  if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding.

(2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward,