Article on set-off and carry-forward of the losses under The Income-Tax Act, 1961

Thursday, November 22, 2007, 15:21 Income Tax Articles

The colour of money The Income-Tax Act, 1961, allows set-off and carry-forward of the loss incurred by any assessee subject to some restrictions Apart from other information, the new income-tax forms, ITR-1 to ITR-8, notified by the Central government seeks details on set-off of losses. Now almost every assessee has to give this information. Therefore, one has to be aware of the exact provisions relating to set-off. Otherwise there is every possibility of claiming incorrect set-off. Loss in common parlance is understood as excess of expenses over income. The Income-Tax Act, 1961, allows set-off and carry-forward of the loss incurred by any assessee subject to some restrictions. Let us see the relevant provisions relating to set-off of losses under the different heads of income:

Loss

from

Business/profession

[Sec

72]

* Any loss under the head, profit and gain of business, other than speculation loss and depreciation can be set off against any other business income or any other head of income, except salary income, in the sameassessment year.

* After such setting off, if the resultant figure is yet a loss (business loss): If the loss in greater than income from any other business or income from any other head, then such loss can be carried forward up to eight assessmentyears. On carrying forward to subsequent years, this loss can be set off only against business income and not against any other head of income.

* Speculation loss can be set off only against speculation profit in the same assessment year. But even after such setting off if the resultant figure is a loss, then it can be carried forward for set off in subsequent years up to fourassessment years. From assessment year 2006-07 up to assessment year 2005-06 such

loss could be carried-forward for eight assessment year. In subsequent years, setting-off of the loss is allowed only against speculation profit [Section 73].

Transactions in derivatives entered into on recognised stock exchange through a broker or a Securities and Exchange Board of India (Sebi)-recognised intermediary and supported by a time-stamped contract note is excluded from the definition of speculative transaction [Section 43(5)(d)]. Thus, such loss is to be treated in the same manner as non speculative business loss. Speculative business loss can be set off against only speculative business income. But non-speculative business loss can be set off against any business income (whether speculative or non speculative) .

Depreciation

can

be

set

off

in

the

same assessment year

as

well

as

in

the

subsequent assessment years against business income or any other head of income except salary income. Further, depreciation can be carried forward indefinitely for set-off in subsequent years [Section 32(2)].

* As unabsorbed depreciation can be carried forward for any number of years. In subsequent years, one must first set off current years depreciation, then brought forward business loss and then the unabsorbed depreciation.

* Continuity of business is now not necessary for the purpose of set-off and carry-forward.

Loss

from

house

property

[Sec

71B]

* Loss arising from a house property can be set off against income from any other house property or income from any other head in the same assessment year.

* If income from house property is negative even after such set-off, then such loss can be carried forward up to eight assessment years for set-off. But in subsequent years, it can be set off only against income from house property.

Loss

from

capital

gains

(Section

70

74)

* Short-term capital loss can be set off against any capital gain income, long term or short term, in the sameassessment year. It should be noted that such loss can be set off only against capital gain income and not against any other head of income. Balance short-term capital loss if any can be carried forward up to eight assessments years. In the subsequent years also, it can be set off against any capital-gain income.

Long-term

capital

loss

i) Long-term capital loss arising on sale of capital asset other than equity shares and units of equityorientedmutual fund which are subject to securities transaction tax (STT) can be set off in the same assessment year as well as in subsequent assessment years (in case of carry-forward) only against long-term capital gain income. Carry-forward of loss is allowed up to eight assessment years.

ii) Long-term capital loss arising on sale of equity shares and units of equity-oriented mutual fund, which is subject to securities transaction tax (STT), is not allowed to be either set off or carried forward (as income from such source is exempt from tax) [Section 14A].

Loss

under

the

head

Other

sources

(Section

71)

Any loss under the head, Other sources can be set off in the same assessment year against income from any other source or income from any other head. Salary, business/profession . The loss cannot be carried for set-off in forward future.

* Loss from owning and maintaining race horses [Section 74A] Any loss arising from owning and maintaining race horses can be set off against income from such activity only in the

same assessment year or in subsequentassessment years (in case of carry- forward). In case of this loss, it is allowed to be carried forward up to fourassessment years.

Loss under any head can be set off against speculative income, capital gain income, income from maintaining race horses. But the reverse is not possible. Loss from speculation, loss under capital gain and loss from maintaining race horses can be set off only against the respective specific income. In other words, loss from speculation can be set off only against speculation income. Loss from capital gain can be set off only against capital gains income and so on.

A loss from any source cannot be set off against winnings from lotteries, crossword puzzles, races (including horse races), card games, other games or any sort of gambling or betting. Loss on bonus stripping/dividend stripping cannot be set off against any income. Return of loss must be filed within due date of filing of return or else carry-forward of loss to the subsequent year is not allowed. However, this condition does not apply in case of house property loss and unabsorbed depreciation. Related posts: 1. How to Compute Turnover In Case Of Future and Options Trades, Speculation Trades and Applicability of Tax Audit U/s. 44AB of the Income Tax Act, 1961 2. Losses Abroad to Reduce Taxable Income in India

3. Frequently asked questions by NGOS, Queries related to Income Tax Act, 1961 4. Stay Applications uner the Income Tax Act, 1961 5. PROCEEDINGS UNDER SECTIONS 144-A AND 144-B OF THE INCOME-TAX ACT, 1961PROCEDURAL INSTRUCTIONS