Unit III
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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)]
