What is set off of losses
The
adjustment of losses from one head against the income, profits or gains of any
other head of income during the assessment year is called set-off of losses. In
other words, Set off losses means setting off losses against income of the same
year. Set-off. It means adjustment of losses against the profits from another
source in same or another head (subject to exceptions as provided in the Act)
in the same Assessment year).
Set-Off =
When only "Set-Off" word is used. Then it means to Adjust the Losses
of the current year with the profit of current year.
Set off of losses
Set off of losses means adjusting the losses
against the profit/income of that particular year. Losses that are not set off
against income in the same year, can be carried forward to the subsequent years
for set off against income of those years. A set-off could be :
(a) Intra-Head Set Off [i.e.
adjust within same head]
(b) Inter-Head Set Off [i.e.
adjust with other heads]
(a) Set off of loss under the same head of income (Intra-Head Set Off)
[(Section 70)]
If the net result for any assessment year
in respect of any source under any head of income is a loss , the assessee is
entitled to have the amount of such loss set off against the income from any other
source under the same head of income.
The process of adjustment of loss from a
source under a particular head of income against income from other source under
the same head of income is called intra-head adjustment.
For example
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”.
Exceptions
to an intra-head set off
To the aforesaid rule, the following are the
exceptions:
(i) LOSS FROM SPECULATION
BUSINESS
Losses from a Speculative business [Section 43(5)
and Explanation to section 28 and section 73] will only be set off against the
profit of the speculative business. One cannot adjust the losses of speculative
business with the income from any other business or profession.
(ii)
LOSS
FROM AN ACTIVITY OF OWNING AND MAINTAINING RACE-HORSES
Loss from an activity of owning and maintaining race-horses
will be set off only against the profit from an activity of owning and
maintaining race-horses.
(iii)
LONG-TERM
CAPITAL LOSS
Long-term capital loss will only be adjusted towards
long-term capital gains. However, a short-term capital loss can be set off
against long-term capital gain or short-term capital gain.
(iv) LOSSES FROM
A SPECIFIED BUSINESS
Losses from a specified business will be set off only
against profit of specified businesses. But the losses from any other
businesses or profession can be set off against profits from the specified
businesses.
(v) LOSS CANNOT BE SE OFF AGAINST WINNING FROM
LOTTERIES, CROSSWORD PUZZLES, etc.
By virtue of section 58(4) a loss cannot
be set off against winnings from lotteries, crossword puzzles, races including
horse races, card games and other games of any sort of from gambling or betting
of any form or nature.
(vi) Loss from purchase and sale of
securities.
(b) Set off of loss from one head against income
from another head (Inter-head Set Off) [Section 71]
Where the net result of
computation made for any assessment year in respect of any head of income is a
loss, the same can be set off against the income from other heads.
For
example :
(i)
Loss
from House property can be set off against income under any head
(ii)
Business
loss other than speculative business can be set off against any head of
income except income from salary.
Exceptions
to an inter-head set off
The
following are the exceptions to the aforesaid rule. Thus, the following losses can not be set
off against any other head of income:
(i)
LOSS IN A
SPECULATION BUSINESS
Loss
in a speculation
business cannot be set off against any other income.
(ii)
LOSS IN A BUSINESS
SPECIFIED UNDER SECTION
35AD
Loss, computed in
respect of any specified
business referred to in section 35AD, cannot be set off against
any other income.
(iii)
LOSS UNDER THE
HEAD “CAPITAL GAINS”
Losses under
the head “Capital gains” cannot
be set off against income under other heads of income.
(IV)
LOSS FROM THE ACTIVITY OF OWNING AND MAINTAINING RACE HORSES
Losses from
the business of
owning and maintaining
race
horses
cannot be set off against any other income.
(V)
A LOSS
CANNOT BE SET
OFF AGAINST WINNINGS
FROM LOTTERIES, etc.
By virtue
of section 58(4),
a loss cannot
be set off
against
winnings from
lotteries, crossword puzzles,
races (including
horse races),
card games and
other games of
any sort or
from
gambling
or betting of any form or nature.
(VI) Loss
from purchase and sale of securities [Section 94(7)]
(VII)
BUSINESS LOSS CANNOT BE SET
OFF AGAINST SALARY [Section 71(2A)]
Loss from
business or profession
(including unabsorbed depreciation) cannot be set off against income under the
head
“Salaries”.
Carry forward of losses
After
making the appropriate and permissible intra-head and inter-head adjustments,
there could still be unadjusted losses. 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 years for adjustment against the eligible
profits of that year. These have been discussed as under:
(i) Losses from House Property
(a)
Can be carry forward up to next 8 assessment years
from the assessment year in which the loss was incurred
(b)
Can be adjusted only against Income from house
property
(c)
Can be carried forward even if the return of income for
the loss year is belatedly filed.
(ii) Losses from
Non-speculative Business (regular business) loss :
(a)
Can be carry forward up to next 8 assessment years
from the assessment year in which the loss was incurred
(b)
Can be adjusted only against Income from business or profession
(c)
Not necessary to continue the business at the time
of set off in future years
(d)
Cannot be carried forward if the return is not
filed within the original due date.
(i)
Speculative Business Loss
(a) Can be carry forward up to next 4 assessment years from the
assessment year in which the loss was incurred
(b)
Can be adjusted only against Income
from speculative business
(c)
Cannot be carried forward if the
return is not filed within the original due date.
(d)
Not necessary to continue the
business at the time of set off in future years
(ii)
Specified Business Loss under 35AD
(a) No time limit to carry forward the losses from the specified
business under 35AD
(b) Not necessary to continue the business at the time of set off in
future years
(c) Cannot be carried forward if the return is not filed within the
original due date
(d) Can be adjusted only against Income from specified business
under 35AD
(iii)
Capital Losses
(a) Can be carry forward up to next 8 assessment years from the
assessment year in which the loss was incurred
(b) Long-term capital losses can be adjusted only against long-term
capital gains.
(c) Short-term capital losses can be set off against long-term
capital gains as well as short-term capital gains
(d) Cannot be carried forward if the return is not filed within the
original due date
(iv)
Losses from owning and maintaining race-horses
(a) Can be carry forward up to next 4 assessment years from the
assessment year in which the loss was incurred
(b) Cannot be carried forward if the return is not filed within the
original due date
(c) Can only be set off against income from owning and maintaining
race-horses only
KEY NOTE
Carry Forward = It always means "Carry Forward and
Set-Off" of loss which is taking the excess losses of the current year to
the next years and then adjust with the profit of those coming years.
Rule for carry forward of loss:
|
Type of loss to be carried forward
to next year(s)
|
Income against which carried forward
loss can be set off
|
For how many years loss can be
carried next year(s)
|
Should the business be continued
forward
|
Is it
necessary to submit return of loss in time
|
|
House property loss (Applicable from AY 1999-00)
|
Income under the head “Income from House property”
|
8 years
|
NA
|
No
|
|
Speculation loss (not being unabsorbed depreciation, etc.)
|
Speculation profits
|
4 years
|
Not necessary
|
Yes
|
|
Unabsorbed depreciation, capital expenditure on scientific
research and family planning
|
Any income but other than income under the head “Salaries”
|
No time limit
|
Not necessary
|
No
|
|
Non Speculation business loss
|
|
|
|
|
|
Unabsorbed depreciation, capital
expenditure on scientific research and family planning
|
Any income but
other than income under the head “Salaries”
|
Not time limit
|
Not necessary
|
No
|
|
Loss from a
specified business under section 35AD
|
Income from a
specified business under section 35AD
|
Not time limit
|
Not necessary
|
Yes
|
|
Other remaining business loss
|
Any business profit (speculative/Non speculative)
|
8 years
|
Not necessary
|
Yes
|
|
Capital Loss
|
|
|
|
|
|
Short term
capital loss
|
Any income under
the head “Capital Gains”
(i.e. Short term
as well as Long term capital gains)
|
8 years
|
Not necessary
|
Yes
|
|
Long term capital
loss
|
Long term capital
gains
|
8
years
|
Not
necessary
|
Yes
|
|
Loss from the
activity of owning and maintaining race horses
|
Income from the
activity of owning and maintaining race horses
|
4
years
|
Yes
|
Yes
|
Summary for adjustments of loss
Head of Income
|
Salary
|
House Property
|
Non Speculative Business
|
Speculative Business
|
LTCG
|
STCG
|
Owning & maint-enance of race horses
|
Others
|
Loss under the head House Property
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Speculative business loss
|
No
|
No
|
No
|
Yes
|
No
|
No
|
No
|
No
|
Other business or professional loss
|
No
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Long term
|
No
|
No
|
No
|
No
|
Yes
|
No
|
No
|
No
|
Short term capital loss
|
No
|
No
|
No
|
No
|
Yes
|
Yes
|
No
|
No
|
Loss from owning and maintenance of race horses
|
No
|
No
|
No
|
No
|
No
|
No
|
Yes
|
No
|
Carry forward and Set-off of brought forward losses
If a loss cannot be
set off either under the same head or under the different heads because of
absence or inadequacy of the income of the same year, it may be carried forward
and set off against the income of the subsequent year.
|
Section
|
Nature of loss to be carried forward
|
Income against which the brought
forward loss can be set off in subsequent years.
|
Maximum permissible period [from the end of the relevant assessment
year] for carry forward of losses
|
|
71B
|
Unabsorbed loss from house property
|
Income from House Property
|
8 assessment years
|
|
72
|
Unabsorbed
business loss (non- speculative)
|
Profit and gains
from business or profession (non- speculative)
|
8 assessment years
|
|
73
|
Loss from
speculation business
|
Income from speculation business
|
4 assessment years
|
|
73A
|
Loss from specified business under section 35AD
|
Profit from specified business under section 35AD
|
Indefinite period
|
|
74
|
Long-term capital loss
|
Long-term capital gains
|
8 assessment years
|
|
74
|
Short-term capital loss
|
Short/Long-term capital gains
|
8 assessment years
|
|
74A
|
Loss from the activity of owning and maintaining race horses
|
Income from the activity of owing and maintaining race horses.
|
4 assessment years
|
Order of Set-off of
losses
In case where profits are insufficient to absorb
brought forward losses, current depreciation and current business losses, the
same should be deducted in the following order
|
Order of set off
|
Particulars
|
Section
|
|
1
|
Current
scientific research expenditure
|
35(1)
|
|
2
|
Current
depreciation
|
32(1)
|
|
3
|
Brought
forward business losses
|
72
|
|
4
|
Losses in speculation business
|
73
|
|
5
|
Unabsorbed
depreciation
|
32(2)
|
|
6
|
Unabsorbed
scientific research capital expenditure
|
35(4)
|
|
7
|
Unabsorbed
development allowance
|
33A(2)(ii)
|
|
8
|
Unabsorbed
investment allowance
|
32A(3)(ii)
|
By filing a loss return in
pursuance of a notice under section 148 but beyond time available for filing a
voluntary return under section 139(1), the assessee cannot be entitled to
determination of loss for the purpose of carry forward and set off.
[Koppind (P) Ltd v. CIT (1994)
207 ITR 228 : 77 Taxman 359 (Cal)]
However, 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.
[Lodhi Property Co. Ltd. v.
Department of Revenue (2010) 191 Taxman 74 (Del)]
Losses in speculation business – Trading of shares was not
primary activity-Solitary transaction of sale of shares could not have been treated
as speculative business
Allowing the appeal of the assessee
the Tribunal held that ; trading of shares was not primary activity of
assessee, accordingly the solitary transaction of sale of shares by
assessee could not be held to be part of carrying on business of trading in
shares , hence, said sale transaction could not have been treated as
speculative business of assessee under Explanation to Section 73. (Related Assessment
year 2003 -04)
[Moser Baer India Ltd. v. DCIT (2018) 170 ITD 522 (ITAT Delhi)]
Carry
forward and set off of business losses -Speculation losses-There is no bar in
adjustment of unabsorbed business losses from speculation profit of current
year, provided speculation losses earlier years has been first adjusted from
speculation profit
Assessing Officer did not allow set off
of unabsorbed non-speculation business loss incurred by assessee against
current year’s speculation profit. CIT(A) up held that order of Assessing Officer.
On appeal Tribunal held thatthere is no bar in adjustment of unabsorbed
business losses from speculation profit of current year, provided speculation
losses for earlier years has been first adjusted from speculation profit . followed
CIT v. Ramshree Steels (P) Ltd. (2018) 400 ITR 61 (All) (Related Assessment year 2011-12)
[Edel Commodities Ltd. v. DCIT (2018) 194 TTJ 86 : 170 ITD 402 : 166 DTR
289 (ITAT Mumbai)]
Unabsorbed depreciation and carried forward losses – A return filed
under section 153A is deemed to be a return filed under section 139(1).
Accordingly, the restrictive provisions of Section 80 do not apply. The return
under section 153A, once accepted and assessed, replaces the original return
filed under section 139. Therefore, the assessee is eligible for carry forward
business loss
Dismissing
the appeal of the revenue the Tribunal held that ; A return filed under section
153A is deemed to be a return filed under section 139(1). Accordingly, the
restrictive provisions of S. 80 do not apply. The return under section 153A,
once accepted and assessed, replaces the original return filed under section 139.
Therefore, the assessee is eligible for carry forward business loss. (ITA No. ITA No. 2461/DEL/2016, dated 06.06.2018 (Related Assessmnet
year 2010-11)
[ACIT v. Splendor Landbase Limited (ITAT Delhi), www.itatonline.org]
Losses in speculation business-Loss in share transactions to be treated
as speculative loss-Loss cannot get settled as business income with other
trading
Dismissing the appeal the Court
held that; since the assessee was dealing in purchase and sale of shares, the
Explanation to section 73 of the Income-tax Act, 1961 would have a bearing on
the issue. Thus, the loss suffered by the assessee in share transactions was to
be treated as a speculative loss within the meaning of section 73 of the Act.
[Ratnamani Seamless (P) Ltd. v.
ITO (2017) 393 ITR 339 (Guj)]
Losse in speculation business
-Principal business is trading of shares, loss incurred in share trading will
not be treated as speculation business loss-Amendment inserted in Explanation
to Section 73 by Finance (No. 2) Act, 2014 with effect from 01.04.2015 is
clarificatory in nature. Allowing the appeal of the assesse , the Tribunal held
that; if principal business is trading of shares, loss incurred in share
trading will not be treated as speculation business loss- Amendment inserted in
Explanation to Section 73 by Finance (No. 2) Act, 2014 with effect from 01.04.2015
is clarificatory in nature and would therefore operate retrospectively from 01.04.1977
from which date Explanation to Section 73 was placed on statute. (Related Assessment
year 2009-10)
[Fiduciary Shares & Stock (P)
Ltd. v. ACIT (2016) 181 TTJ 750 : 159 ITD 554 (ITAT Mumbai)]
Losses - Speculation business - Set off-Interest on advances and
loans-Purchase and sale of shares-Loss from sale of shares was entitled to set
off against profits of business of company
Under Explanation to section 73,
business of purchase and sale of shares by assessee was speculation business
and it was entitled to set off losses from sale and purchase of share against
profits of business of company from loans and advances. (Related Assessment
years 1998-99 to 2000-01)
[Saurabh Industrial Financing Ltd.
v. ITO (2013) 219 Taxman 112(Mag.) (All)
Depreciable assets–Set off-Short term capital gain on long term
depreciable assets can be set off against long term capital loss
Short-term capital gain computed
under section 50 on long-term depreciable assets can be set off against long term
capital loss under section 74. (Related Assessment year 2005-06)
[CIT v. Manali Investment (2013)
219 Taxman 113(Mag) (Bom)]
Original return filed in
time-Date of filing of revised return is not relevant for carrying forward the loss
The assessee filed the original return in time claiming the short
term capital loss. Assessing Officer held that the loss was not filed on due
date hence not entitled to carry forward loss. CIT (A) held that the Assessing
Officer has not considered the original return but only revised return hence
directed to allow the carry forward the loss. On appeal by revenue the Tribunal
held that disentitlement for carry forward of loss under section 80 comes into
play only when original income tax return disclosing loss sought to be carried
forward, is not filed within time prescribed under section 139(1); date of
filing of revised return is not to be considered for this purpose. (Related
Assessment year 2009-10).
[DCIT v. Ashok Walia (2013) 60 SOT 72(URO) (ITAT Kolkata)]
Even current year’s loss can be set off against
undisclosed income declared in
survey
[CIT v. Shilpa
Dyeing & Printing Mills (P) Ltd. (2013) 219 Taxman 279
(Guj)]
Where income from a particular source is exempt from
tax, e.g., incomes exempt under section 10, loss from such source cannot be set
off against income chargeable to tax. For the purpose of section 71, loss of profits
must be a loss of taxable profits
[Ramjilal Rais v. CIT (1965) 58 ITR 181 (All)]
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