Dibrugarh University B. Com 6th Semester Direct Tax-II Notes Unit-3 - myedu365

Unit III


Syllabus
Carry forward and set off of losses, unabsorbed depreciation.

Set-off and carry forward of losses

Income-tax is levied on the total income of any assessee of a previous year. Total income is calculated by aggregating the income of the assessee under different sources of income falling under one head of income and then all heads of income are put together to find out the net result in the shape of total income. It is not necessary that every source shall result into a profit every year. There may be loss under one source and profit under another source. So when the income of different sources is put together the loss of one source is to be adjusted against the income of another source. When the income of all heads is aggregated, the loss under one head is set-off against the income of another head and if at all the total result is a loss, the same is carried forward over future years for setting off. Sections 70-79 of the Income tax Act, 1961 deal with the provisions regarding set-off losses and carry forward and set-off losses.

Set-off losses:

A. Set-off losses from one source against income from another source within the same head of income:

The income under one head is computed by adding together the incomes from different sources which fall under the same head. Section 70 says that the loss of one source is adjusted against the income of another source falling under the same head of income. Suppose the assessee is running two-three different businesses and the income of the head is calculated by combining different sources. So it is automatic that if there is loss under one source, the same is adjusted or set-off against the available income under other sources in the same head of income.

There are some exceptions to this rule that a loss can be set-off against any other income under the same head:-

a. Speculation loss [section 73(1)]

Any loss computed in respect of speculation business carried on by assessee shall not be set-off except against profits and gains, if any, of another speculation business.

However, losses from other business can be adjusted against profits from speculation business.

b. Long term capital loss [section 70(3)]

Long term capital loss from the transfer of a capital asset shall be allowed to be set-off only out of the long-term capital gain from the transfer of another capital asset. However short term capital loss shall be allowed to be adjusted out of long term as well as short term capital gain.

c. Loss from running and maintenance of race horses [section 74A(3)]

Loss from owning and maintenance of horses shall be set-off only out of the income from owning and maintenance of horses. This means that loss from the activity of owning and maintaining race horses cannot be set-off against any other income.

d. Losses from specified business [section 73A(1)]

 A loss in any specified business referred in section 35AD can be set-off only against any other specified business.

However, losses from other business can be set-off against profits from specified business.

e. Loss from an exempted source of income

If a person has loss from a source of income which is exempt under any provision of this Act, such loss cannot be set-off against the income of any other source which is taxable.

B. Set-off loss of one head against the income of another head in the same assessment year i.e., inter-heads set-off:

A loss which could not be set-off within the same head of income shall be allowed to be set-off out of income of any other head in the same assessment year. However, the following points should be considered:

a. Where the net result of the computation under any head of income (other than ‘capital gain’) is a loss, the assessee can set-off such loss against his income assessable for that assessment year under any other head, including ‘capital gains’.

b. Where the net result of the computation under the head ‘profits and gains of business or profession’ is a loss, such loss cannot be set off against income under the head ‘salaries’.

c. Where the net result of computation under the head ‘capital gains’ is a loss, such capital loss cannot be set –off against income under any other head.

d. Where the net result of the computation under the head ‘Income from house property’ a loss and the assessee has income assessable under any other head of income, the amount of such loss exceeding Rs 2 lakhs would not be allowable to be set-off against income under the other head. In other words, the maximum loss from house property which can be set-off against income from any other head is Rs 2 lakhs.

e. Speculation loss, loss from the activity of owning and maintaining race horses and losses from specified business referred to in section 35AD cannot be set off against income under any other head.

Carry forward and set-off losses:

Where in any assessment year, the loss under any head is not adjusted as per rules; the same shall be carry forward and set-off against the income of subsequent years.

1. Carry forward and set-off losses from House property [section 71B]:

i. In any assessment year, if there is a loss under the head “income from house property”, such loss will first be set off against income from any other head to the extent of Rs 200000 during the same year.

ii. The unabsorbed loss will be carried forward to the following assessment year to be set-off against income under the head “Income from house property”.

iii. The loss under this head is allowed to be carried forward up to 8 assessment years immediately succeeding year in which the loss was first computed.

Iv. It is remembered that once a particular loss is carried forward, it can be set only against the income from the same head in the forthcoming assessment years.

2. Carry forward and set-off Business losses [section 72 & 80]:

Under this Act, the assessee has the right to carry forward the loss from the business and profession in cases where such loss cannot be set-off due to the absence or inadequacy of income under any other head in the same year. The loss so carried forward can be set-off against the profits of subsequent previous years.

Section 72 covers the carry forward and set-off losses arising from a business or profession.

The assessee’s right to carry forward business losses under this section is, however, subject to the following conditions:-

i. The loss should have been incurred in business, profession or vocation.

ii. The loss should not be in the nature of a loss in the business of speculation.

iii. The loss may be carry forward and set-off against the income from business or profession though not necessarily against the profits and gains of the same business or profession in which the loss was incurred.

However, a loss carried forward cannot, under any circumstances, be set-off against the income from any head other than “profits and gains of business or profession”.

iv. The loss can be carried forward and set-off only against the profits of the assessee who incurred loss. That is, only the person who has incurred the loss is entitled to carry forward or set off the same. Consequently, the successor of a business cannot carry forward or set-off losses of his predecessor except in the case of succession by inheritance.

v. A business loss can be carried forward for a maximum period of 8 assessment years immediately succeeding the assessment year in which the loss was incurred.

vi. As per section 80, the assessee must have filed a return of loss under section 139(3) in order to carry forward and set-off a loss. In other words, the non-filing of a return of loss disentitles the assessee from carrying forward the loss sustained by him. Such a return should be filed within the time allowed under section 139(1).

3. Loss of speculation business [section 73]:

Where for any assessment year the loss under speculation business has not been wholly set-off against the income of another speculation business, such part of speculation loss shall be carried forward to the following assessment year and set-off only against the profits of any speculation business carried on by the assessee and assessable during those assessment years. The unabsorbed speculation business loss is eligible for carry forward up to 4(four) assessment years immediately succeeding the assessment year for which the loss was computed.

4. Carry forward and set-off losses by Specified businesses [section 73A]:

i. Any loss computed in respect of the specified business referred to in section 35AD shall be set-off only against profits and gains, if any, of any other specified business.

ii. The unabsorbed loss, if any, will be carried forward for set-off against profits and gains of any specified business in the following assessment year and so on.

iii. There is no time limit specified for carry forward and set-off and therefore, such loss can be carried forward indefinitely for set-off against income from specified business.

iv. However, return of loss has to be filed on or before the due date of filing of return under section 139(1) for carry forward of loss from specified business.

5. Losses under the head ‘Capital Gains’ [section 74]:

Section 74 provides that where for any assessment year, the net result under the head ‘capital gains’ is short-term capital loss or long-term capital loss, the loss shall be carried forward to the following assessment year to be set-off in the following manner:

i. Where the loss so carried forward is a short-term capital loss, it shall be set-off against any capital gains, short-term or long-term, arising in that year.  

ii. Where the loss so carried forward is a long term capital loss, it shall be set-off only against long term capital gain arising in that year.

iii. Net loss under the head capital gains cannot be set-off against income under any other hand.

iv. Any unabsorbed loss shall be carried forward to the following assessment year up to a maximum of 8 assessment years immediately succeeding the assessment year for which the loss was first computed.

6. Losses from the activity of owning and maintaining race horses [section 74A(3)]:

i. According to provisions of section 74A(3), the losses incurred by an assessee from the activity of owning and maintaining race horses cannot be set-off against the income from any other source other than the activity of owning and maintaining race horses.

ii. Such loss can be carried forward for a maximum period of 4 assessment years for being set-off against the income from the activity of owning and maintaining race horses in the subsequent years.

Unabsorbed Depreciation [section 32(2)]:

With effect from assessment year 2003-04 depreciation which remains unadjusted as either there is no income or less income in the relevant previous year, it can be carried forward till it is fully adjusted from any income during the succeeding previous years. It shall be treated as depreciation of the succeeding previous year. In case there is carry forward business loss as well as carry forward unabsorbed depreciation, then following order should be followed for set-off.

i. Firstly current depreciation.

ii. Secondly brought forward business loss.

iii. Thirdly brought forward / unabsorbed depreciation.

 

Order of set-off losses:

As per the provisions of section 72(2), brought forward business loss is to be set-off before setting off unabsorbed depreciation. Therefore, the order in which set-off will be effected is as follows –

a. Current year depreciation / current year capital expenditure on scientific research and current year expenditure on family planning, to the extent allowed.

b. Brought forward loss from business / profession [section 72(1)]

c. Unabsorbed depreciation [section 32(2)]

d. Unabsorbed capital expenditure on scientific research [section 35(4)]

e. Unabsorbed expenditure on family planning [section 36(1)(ix)]

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