Carry forward of losses

5 heads of income
• (1) Income from salary
• (2) Income from house property
• (3) Income from business or profession
• (4) Income from capital gains including Long
term capital gains and short term capital gains
• (5) Income from other sources eg interest
income, dividend, gifts, lottery
Set off and Carry forward of losses
• Set off : it refers to adjustment of losses
against the eligible profits of the year . It is
governed by section 70 and section 71 of the
act.
 Set off

Inter Source Inter Head

Adjustment Adjustment
Within the same Within other
head of income heads of income
(Section 70) (Section 71)
• Section 70 : Inter source adjustment
(Intrahead)
• Setting off loss of one source against income
from other source within the same head .
• Examples
• Loss of one self occupied property can be set
off against income let out property .
• Loss from textile business can be set off
against profit of leather business
Taxable income from business = ( 500000 –200000)= 300000
• Rules of inter source adjustment
• (Rule 1) Loss from speculation business can be only set
off only against profit of a speculation business .
• That is , loss from a non speculation business can be
set off against profit of
• Non speculation business
• Speculation business
• But for setting off loss from a speculation business ,
you need to necessarily have income from a
speculation business .
 SPECULATION BUSINESS
• Transaction in which a contract for the purchase or
sale of any commodity, including stocks and shares, is
periodically or ultimately settled, otherwise than by
the actual delivery or transfer of the commodity or
scrip's. (Section 43(5))
Exceptions :
Contract in respect of -
•Raw material or merchandise
•Stocks and shares by a
dealer or investor
Guard against
•Member of forward market or a price
stock exchange in the course of fluctuation
jobbing or arbitrage
• (Rule 2 ) Loss from activity of owning and
maintaining race horses can only be set off
against income from same business .
• That is , it can be set off against profit of a
business of owning and maintaining race
horses .
• NOTE : ACTIVITY OF OWNING AND
MAINTAINING RACE HORSES IS NOT A
SPECULATIVE BUSINESS .
• (Rule 3 ) NO loss can be set off against
winnings from lotteries ,crossword puzzles etc
• That is casual winnings is not available for set
off against any type of loss ,irrespective of
under which head such loss has occurred
• (Rule 4) long term capital loss can only be set
off against long term capital gain .
• THAT IS
• Long term capital loss can be set off only
against gain on sale of any other long term
capital asset .It cannot be set off against short
term capital gain .
• However , for purpose of set off of short term capital loss ,
both short term capital gains and long term capital gains are
available . Summary is
• Long term capital loss Short term capital gains

• Short term capital loss Long term capital gains

• Long term capital loss long term capital gain
• ( Rule 5 ) loss from an exempt source of income
cannot be set off against profit of a taxable
source .
• Example
• Loss from agriculture (exempt u/s 10 ) cannot be
set off against profit of textile business .
• Long term capital loss on sale of shares in a
recognized stock exchange (exempt u/s 10(38)
cannot be set off against long term capital gains
on sale of house
• Section 71: Inter Head Adjustment
• Under this section , loss which could not be
set off u/s 70 ( i.e. by way inter source
adjustment ), can be set off against income
under other heads .
• However it is also subject to certain
restrictions or rules .
Example
• Profit from Business A - Rs. 70000
Less set off u/s 70 (Business B) - Rs.70000
0
Income from house property - Rs.510000
Less set off u/s 71 (Business B) - Rs.220000
Gross total income - Rs.290000
• (Rule 1) loss from a speculation business cannot
be set off against income of any other head .
• It can be set off only against income from a
speculation business .
• (Rule 2 ) loss under the head “profits and gains of
business or profession” cannot be set off against
income from salary .
• the term “ business “ in the above sentence refers
to non speculation business only , as rule (1)
already cover speculation business
• (Rule 3) Loss from activity of owning and maintaining
race horses can be set off against income from the
same business .
• (Rule 4 ) Any loss under the head capital gains cannot
be set off against any other head
• Long term or short term capital loss cannot adjusted
against income of any other head .
• In short , provisions of section 71 shall not be available
for losses under the head “capital gains’
• However , this doesn’t preclude income under the
head “capital gains “ for being available for adjustment
against losses under other heads .
• Summary
• Loss under capital gains Any other head of income
• Losses under head Long term/short term capital gain
house property
• (Rule 5) No loss can be setoff against winnings from lotteries ,
cross word puzzles ,card games etc (casual winnings )
 Carry forward of losses
• Losses which could not be set off against
income of the assessment year , do not lapse ,
but are allowed to be carried forward to be
set off against income of subsequent years .
• Carry forward of losses for each head is
governed by different sections which define
the no’s of years it can be carried forward for,
against which income it can be set off etc
• Section 71B: Carry forward of loss from “House
Property “
• Set off against: Future income under the head “House
Property “ only .
• Time period : maximum of 8 AY .
• the time period is to be calculated from end of the
relevant assessment year in which loss was suffered .
• Can be carried forward even if the return is filed
belatedly.
Example : if loss relates to AY 2012 -13 , it can be c/f up
to AY 2020 -21
• Section 72: Carry forward of loss of non speculation business .
• Set off against : future income from any business of assessee .
• Time period: 8 AY
• It is not necessary that it is must be set off against income from
same business .
• Example : loss of car business can be carried forward and set off
against profit of computer business
• This c/f and set off is allowed even if the business in which loss was
suffered , has been discontinued .
• However , if the business if transferred , the set off will not be
allowed to the successor , unless such succession is by way of
inheritance .
• IMPORTANT NOTE:
• The carried forward loss can also be set off
against a business activity ,even though such
business activity is assessable under a different
head .
• For example, when an assessee is involved in
letting out property for a shopping mall, it is his
business , but the income from it , for purposes of
income tax is assessed under the head “House
property’’
• Section 73: Loss In Speculation Business .
• Set off against : Income of speculation business only .
• Time Period: 4 AY
• It cannot be set off against any other head .
• The business to which the loss pertains to may be discontinued .
• Section 73A: Loss Of Specified Business u/s 35AD
• any loss computed in respect of a specified business shall be
allowed to be adjusted only profit of some other specified business.
• If any loss remains unabsorbed as above , It can be can be carried
forward
• Conditions for carry forward:
• Set off against: Future income of specified businesses only.
• Time period: it shall be allowed to carried forward without any
time limit ,until it is fully set off
• Section 74: carry forward of loss under the head “capital
gains’’
• Set Off Against:
(1) Unabsorbed Short Term capital loss
- long term capital gains
- short term capital gains .
(2) Unabsorbed Long Term capital loss
- only against long term capital gains
• Section 74A: carry forward of loss of activity of owning and
• maintaining race horses .
Set off against: future income of “same’’ business only .
• time period: 4 AY
• Section 80 read with 139(3) :
• Return Of Loss
• any assessee , who has sustained a loss in any previous year under
the
• head ,
• 1) business or profession
• 2) capital gains
• 3) activity of owning and maintaining race horses .
• And claims to carry it forward for set off in future years , shall
furnish a “Return Of Loss’’ u/s 139(3) .
• This provision shall apply only to above mentioned losses it self .
• Failure to submit return may render the loss unavailable for set off
in future
• Section 72A- In case of amalgamation , the
amalgamated company is allowed to carry
forward loss and U/D of the amalgamating
company subject to certain conditions.
• In case of demerger, the loss is apportioned
proportionately between the demerged and the
resulting company where the loss cannot be
separately identified.
• Section 79- Where there is a change in
shareholding pattern by more than 51% , then
carry forward of loss is not allowed.
Section 32(2) UNABSORBED DEPRICIATION

• Concept: depreciation can be charged only to the extent to bring profits to NIL .
• Hence if profit < depreciation or , there is no profit , then (depreciation – profit) is
called as “ unabsorbed depreciation’’ .
• Eg 1. Business profit before depreciation Rs. 100 lakhs.
• Depreciation Rs. 150 lakhs
• In this case Rs. 50 lakhs is unabsorbed depreciation and NOT BUSINESS LOSS.
• Eg 2 Business loss before depreciation Rs. 150 lakhs
• Depreciation Rs. 80 lakhs
• In this case, Rs. 150 lakhs is BUSINESS LOSS and Rs. 80 lakhs is UNABSORBED
DEPRECIATION.
Treatment:
• Inter Source Adjustment (70) : UAD will be first set off against profit of any other
business or profession ( if any ) .
• Inter Head Adjustment (71) : it can be set off against income of other heads ,
except salaries and casual winnings .
• Carry forward :
• set off against: ANY income except salaries and
casual winnings .
• Priority of set off in future years:
• (1) Current year depreciation .
• (2) brought forward business loss if any
• (3) Unabsorbed depreciation
time period : NO time limit .
• It can be set off even the business to which UAD
pertains to has been discontinued