Prof.

T RAMA KRISHNA RAO

UNIT 3

Residence and tax liability, Exemptions from tax. Set off and carry
forward of losses, Deductions from Gross & total Income

Residential Status and its effect on Tax Incidence

Different Taxable Entities: - All taxable entities are divided in the following categories for the
purpose of determining residential status:

 An individual;
 A Hindu undivided family;
 A firm or an association of persons;
 A joint stock company; and
 Every other person.

Residential Status of an Individual [Sec. 6]

An individual may be

• resident and ordinarily resident in India,

• resident but not ordinarily resident in India,
• non-resident in India.

Resident and ordinarily resident: -

To find out whether an individual is “resident and ordinarily resident” in India, one has to
proceed as follows-

Basic condition [sec. 6(1)]: An individual is treated as Resident in India if he satisfies

any of the following two basic conditions:

(a) He has been stay in India in the previous year for a period of 182 days or more; or
(b) He has been stay in India for a period of 60 days or more during the previous year
and 365 days or more during 4 years immediately proceeding the relevant previous
year.

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Exceptions: -

By virtue of explanation (a) to section 6(1), the period of “60 days” referred to in (b) above
has been extended to “182 days” as follows: -

 An Indian citizen who leaves India during the previous year for the purpose of
employment outside India or an Indian citizen who leaves India during the previous year
as a member of the crew of an Indian ship.
 Indian citizen or a person of Indian origin who comes on a visit to India during the
previous year.

Additional Conditions [Sec. 6(6)]: A residence individual is treated as ordinarily resident in

India if he satisfies the following two additional conditions: -

a) He has been resident in India in at least 2 out of 10 previous years immediately

preceding the relevant previous year; and
b) He has been in India for a period of 730 days or more during 7 years immediately
proceeding the relevant previous year.

Resident but not Ordinarily Resident in India: - An individual who satisfies at least one of the
basic conditions but does not satisfy the two additional conditions is treated as a resident but not
ordinarily resident in India.

Non resident: - An individual is a non-resident in India if he satisfies none of the basic

conditions. In the case of non-resident, additional conditions are not relevant.

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Incidence of Tax (Scope of Total Income)

The tax is levied on total income of a person. The total income is based upon the residential
status of an assessee. Section 5 provides the scope of total income which varies on the basis of
status. Section 5 provides:

1. Subject to the provisions of this Act, the total income for any previous year of a person who
is resident includes all incomes from whatever source derived, which
i. Is received or is deemed to be received in India in such year by or on behalf of such
person or
ii. Accrues or arises or is deemed to accrue or arise to him in India during such year; or
iii. Accrues or arises to him outside inida during such year;
Provided that, in the case of a person not ordinarily resident in India within the meaning of
sub section (6) of section 6 the income which accrues or arises to him outside India shall not
be included unless it is derived from business controlled in or a profession set up in India.
2. Subject to the previous of this Act, the total income of any previous year of a person who is a
non-resident includes all incomes from whatever source derived which:
i. Is received or is deemed to be received in India in such year by or on behalf of such
person; or
ii. Accrues or arises or is deemed to accrue of arise to him in India.

i. Scope of total income of a ‘Resident’ [Sec. 5(1)]:

 Income received or deemed to be received in India during the relevant accounting year.
The place and date of accrual is immaterial.
 Income which accrues or arises or is deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.
 Income accruing during the relevant accounting year outside India whether it is brought or
not in India during the year.
Scope of income = Indian Income + Foreign Income

ii. Scope of total income of ‘Not Ordinary Resident’ [Sec. 5(1)]

 Income received or deemed to be received in India during the relevant accounting year.
The date and place of accrual is immaterial.
 Income which accrues or arises or is deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.
 Income accruing or deemed to accrue or deemed to be received outside India during the
relevant accounting year from a business set up in and controlled from India.
Scope of income = Indian Income + One Particular type of foreign income

iii. Scope of total income of ‘Non-Resident’ [Sec. 5(2)]:

 Income received or deemed to be received in India during the relevant accounting year.
The date and place of accrual is immaterial.
 Income which accrues or arises or is deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.
Scope of income = Indian income

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Types of Income

Indian income: Indian income is called by various words and names these are:

i. Income earned in India.

ii. Income accrues and arises in India.
iii. Income received or deemed to be received in India.
iv. Income payable in India. Income may have been earned in a foreign country but it is
payable in India.
v. Income earned or accrues in India but it is received or payable outside India.

Foreign income: Following types of incomes are called foreign incomes:

i. Income earned outside India and also received outside India.

ii. Any income which is not earned or accrues in India.

Income received in India: Receipt of a particular income in India attracts tax liability. The
essential fact is that a person must receive income in India during the relevant previous year. The
income may be received by the assessee himself or by his agent, banker or broker on his behalf
in India. It is not essential that a person must receive income either from business or salary.
Assessee may receive income from any source.

All persons are assessable on income received in India during the relevant previous year
irrespective of the residential status.

Income received in money or money’s worth is taxable. Only thing essential is that it must be
certain that the receipt in the form of money’s worth must be income.

Received: The term ‘received’ means the receipt of income on the first occasion. The place of its
receipt shall be the place where it is received for the first time and not the place of its receipt on
subsequent remittance. Thus, the foreign income of a non-resident is not taxable even if it is
remitted to India unless it is received or deemed to be received in India.

Deemed to be Received: ‘Deemed to be received’ means that the income has not been actually
received, but it is deemed to be received under the income tax act. it instances are:
1. The annual accretion to the account of any employee participating in a recognized
provident fund is not actually received by the employee but it is deemed to be received
during the previous year by him under the law.
2. Taxable portion of transferred balance of unrecognized provident fund is deemed to be
received during the previous year.
3. Dividend is deemed to be received in the year in which it is declared but the interim
dividend is deemed to be the income of that previous year in which it is unconditionally
made available to the shareholder.
4. Tax deducted at source
5. Where an individual has been employed by the Central government or any other employer
on or after 1 – 1- 2004, and the employer has contributed in the previous year, to the

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account of the employee under a pension scheme, such contribution is deemed to be the
income received in the previous year.

Deemed to Accrue or Arise:

The words ‘deemed to accrue or arise’ mean that the income has actually not accrued or arisen in
India but it is deemed to accrue or arise in India under the income tax act. Under section 9(1), the
following incomes are deemed to accrue or arise in India:
1. Income is deemed to accrue or arise in India, if it accrues or arises, directly or indirectly:
• Through or from any business connection in India; or
• Through or from any property in India; or
• Through or from any asset or source of income in India; or
• Through the transfer of a capital asset situate in India.
Explanation: if all the operations of a business are not carried out in India, its income that
will be deemed to accrue or arise in India shall be only such part of the income as is
reasonably attributable to the operations carried out in India.
2. Salary earned in India and received outside India [Section 9(1)(ii)]
3. Salary payable by the government to a citizen of India for service outside India [Section
9(1)(iii)]
4. Dividend paid by an Indian company outside India [Section 9(1)(iv)]
5. Income by way of interest [Section 9(1)(v)]: Interest payable by the Indian Government is
deemed to accrue or arise in India, whether it is paid on debts incurred or on moneys
borrowed in India or outside India.
Interest payable by a person who is resident in India or by a non-resident person in
respect of any debt incurred, or moneys borrowed and used, for the purposes of a business
or profession carried on by such person in India is deemed to accrue or arise in India. But if
it is payable in respect of any money borrowed or debt incurred for the purposes of a
business or profession carried on by such person outside India or for the purposes of making
or earning any income from nay source outside India, it will not be deemed to accrue or
arise in India.
6. Income by way of royalty [Section 9(1)(vi)]: Income from royalty shall be deemed to accrue
or arise in India, if it is payable by the Indian government.
Income from royalty payable by a person who is resident in India or by a non-
resident person in respect of any right, property or information used or services utilized for
the purpose of a business or profession carried on by such person in India or for making or
earning any income form any source in India, is deemed to accrue or rise in India. If it is
payable in respect of any right, property or information used or services utilized form the
purposes of a business or profession carried on by such person outside India or for the
purposes of making or earning any income from any source outside India, it will not be
deemed to accrue or arise in India.
7. Income by way of fees for technical services [Section 9(1)(vii)]: Income from fees for
technical services shall be deemed to accrue or arise in India, if it is payable by the Indian
government.
Income by way of fees for technical services payable by a person who is resident in
India or by a person who is non-resident in India in respect of services utilized in a business
or profession carried on by such person in India or for the purposes of making or earning
any income from any source in India, shall be deemed to accrue or arise in India. If it is
payable in respect of services utilized in a business or profession carried in by such person

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outside India or for the purpose of making or earning any income form any source outside
India, it will not be deemed to accrue or arise in India.

SUMMARIZED CHART

Different Kinds of Incomes OR NOR NR

I
i. Income received or deemed to be received in India. It is immaterial whether
it is earned in India or in a foreign country. Yes Yes Yes
ii. Income earned in India whether received, paid in India or outside India. Yes Yes Yes
iii. Income earned and received outside India from a business controlled or
profession set up in India. Income may or may not be remitted to India Yes Yes Not
iv. Incomes earned or received outside India from a business controlled or
profession set up outside India. Yes Not Not
v. Income arises and received outside India from any other source (Except
income under point 3). Yes Not Not
vi. Income earned and received outside Indian the year preceding the previous
year in question and if the same is remitted to India during the current
previous year. Not Not Not
Problems:

1. Nixon, an American citizen, was appointed a Senior Scientific Officer in India on 1st April,
2008. On 31st January, 2016 he went to Uganda on deputation for a period of 3 years, but left
his wife and children in India. On 1st May, 2017 he came to India and took with him his
family to Uganda on 30th June, 2017. He returned to India and joined his original job on 2nd
February 2019. What would be the residential status of Nixon for income tax purposes for the
assessment year 2019 -20? [Ans: Non resident]

2. Sri Om Praksash, an Indian citizen was born in U. K.. He came to India, when he was of 12
years age and went outside India for the first time when he was 25 years of age. He left for U.
K in May 2016 and again came back to India in March 2019. What is his residential status for
the A.Y. 2019-20? [Ans: Non Resident]

3. Shri Ramesh who was born and brought up in India, went for further studies to U.K. on 1st
March, 2017 and came back to India on 1st October, 2018 early in the morning. Find out his
residential status for the Assessment year 2019-20. [Ans: Resident and ordinary resident]
4. Mr. K. an Indian citizen leaves India for the first time on 31st May 2013 and comes back on
15th May 2017. He again leaves India on 10th June 2018 to come back on 14th January 2019.
He is living in India since then. Determine his status for the previous year 2018-19. [Ans:
Ordinary Resident]

5. Mr. Prasad, a foreign citizen, leaves India for the first time in the last 20 years on November
25, 2016. During the calendar year 2017, he comes to India on September 1st and stays for a
period of 20 days, during the calendar year 2018 he does not visit India at all but comes to
India on January 15th, 2019. Determine the residential status of Mr. Prasad for the assessment
year 2019-20. [Ans: Ordinary Resident]

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6. Mr Roy comes to India on 10th may 2016 after staying for 10 years in USA. He stays in India
up to 4th January 2019 and leaves India on 5th January 2019 for USA. During his stay in India
he did not stay for more than 15 days at any particular place as he was exploring the
possibilities of a new business. Determine his residential status for the previous year 2018-19.
What difference it will make if he comes to India after 4 years stay in USA and prior that he
was in India. [Ans: Resident but not ordinary Resident; Resident but not ordinary
Resident]

7. Mr. Peter, a foreigner, came to India from Poland for the first time on 1st April 2012. He
stayed here continuously for 3 years and went to France on 1st April 2012. He, however,
returned to India on 1st July 2015 and went to Poland on 1st December 2016. He again came
back to India on 25th January 2019 on a service in India. [Ans: Ordinary Resident]

Incident of Tax:

9. Which of the following incomes are taxable when the residential status of Mr Prakash is:

Resident, not ordinarily resident, Non-Resident

i. Income accrued in Canada but received in India `2,000

ii. `5,000 were earned in Africa and received there but bought to India.
iii. `5,000 earned in India but received in Canada.
iv. `10,000 earned and received in Srilanka from a business controlled from India.
v. House property income (computed) from Srilanka `2,000
vi. `4,000 was past untaxed foreign income which was brought to India during the P.Y.
vii. Profit earned from a business in Kanpur `10,000
[Ans: `34,000; `27,000; `17,000]

10. The following are the details of income of Shri Ram Lal:
i. Share of income from a joint venture in India `10,000
ii. Dividend `1,000
iii. Income from Agriculture in Pakistan `20,000
iv. Salary received in India `9,800 (computed) but the services for the same were rendered in
Iran.
v. Income from business (Controlled from India) in Pakistan `10,000 and the income remitted
to India.
vi. Income earned and received in Pakistan from Bank deposits `5,000
vii. Income accrued in India but received in Iran `10,000
Compute Mr. Ram Lal’s taxable income if he is a resident, a not ordinarily resident, or a non-
resident.

[Ans: `64,800; `39,800; `29,800]

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11. Mr Anand furnishes the following particulars of his income earned during previous year
relevant to the assessment year 2019-20:
`
1. Interest on German Development Bonds (1/3 is received in India) 51,000
2. Income from agriculture in Bangladesh remitted to India 31,000
3. Income from property in Canada received in USA 1,10,000
4. Income earned from business in Kuwait, business being controlled from Mumbai
(`25,000 is received in India) 65,000
5. Dividend from an Indian company 15,000
6. Royalty received in Singapore from Mr. David, a resident in India, for technical
services provided for a business carried on in Singapore 25,000
7. Profit from a business in Chennai, this business is controlled from Singapore 1,25,000
8. Profit on sale of a building in India, but received in Nepal 2,50,000
9. Income from agriculture in Punjab, received in Mumbai 30,000
10. Profit from business in Indonesia; this business is controlled from Delhi
(60% of the profit deposited in a bank there and 40% is remitted to India) 40,000
11. Interest received from Mr. Dayal, a non resident, on the loan provided to him
for a business in India 28,000
Compute his Gross total Income, if he is: Resident, NOR, NRI

[Ans: `7, 25,000; `5, 25,000; `4, 45,000]

12. Shankar a foreign national furnishes the following particulars of his income relevant for the
previous year 2018-19
`
1. Profit on sale of plant at London (1/2 is paid for rendering services in India) 1,46,000
2. Profit on sale of plant at Delhi (1/2 is received in London) 1,02,000
3. Salary from an Indian company receiving London (1/2 is paid for rendering 60,000
services in India) 40,000
4. Interest on UK development Bond (entire amount is received in London) 30,000
5. Income from property in London received there 49,000
6. Profit from a businesses in Delhi managed from India
7. Income from agriculture in London received there, half of which is used for 25,000
meeting hostel expenses of Shankar’s son in England and remaining amount is
later on remitted to India 17,000
8. Dividend (Gross) received in London on may 6, 2007 from a company registered
in India but mainly operating in UK 12,000
9. Rental income from a property in Nepal deposited by the tenant in a foreign
branch of an Indian bank operating there 3,70,000
10. Gift from a relative in foreign currency (1/3 of which is received in India
and remaining amount is used for meeting education expenses of Shankar’s son
in USA)
Determine Gross total income of Shankar for the assessment year 2019-20 if he is: Resident,
NOR, NRI. [Ans: `4, 64,000; `2, 54,000; `2, 54,000]

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13. Sri Ram a foreign national, furnishes the following particulars of his income relevant to the
assessment year 2019-20:
`
1. Income from property in New York received there 1,20,000
2. Income from business in kolkata managed from Singapore 2,40,000
3. Profit on sale of machinery in California (1/2 received in Kolkata) 90,000
4. Dividend (Gross) received in Thailand from a company registered in India but
mainly operating in Thailand 15,000
5. Income from a house property in Dhaka deposited by the tenant there in a foreign 36,000
branch of SBI
6. Gift in foreign currency `3, 50,000 from a relative (1/2 received in India and the 3,50,000
balance used in New York)
7. Income from agriculture in Burma `45,000 received there 1/3 used while visiting 45,000
there and 2/3 remitted later to Calcutta
8. Income from profession (as a management consultant) in Philippines received 2,20,000
there. The profession set up in India
Compute his total income, if Sri Ram is: A Resident, NOR, NRI

[Ans: `7, 51,000; `5, 05,000; `2, 85,000]

14. For the previous year ended on 31st March 2019 Mr. Z had the following incomes:
`
1. Honorarium received from Govt. of India (expenses incurred `5000) 10,000
2. Profits earned from a business in kerala controlled from Canada 5,000
3. Profits earned from a business in USA controlled from West Bengal 6,000
4. Profit earned from a business in Bangladesh, controlled from Karachi and (credited
to his personal account in the bank there) 4,000
5. Dividend from an Italian company credited to his account in Switzerland 2,000
6. Agricultural income from Thailand not remitted to India 6,000
Compute the total income of Mr. Z for the assessment year 2013-14 if he is: Resident; NOR, or
NRI[Ans: `28,000; `16,000; `10,000]

15. From the following particulars of income of Sh. K. K. Katyal for the previous year 2018-19
you are requested to compute his taxable income assuming Mr. Katyal as:
`
1. Profit earned from business in Delhi 44,000
2. Profit of a business established in UK but controlled from India-amount deposited 20,000
in Bank there 10,000
3. Salary received in UK for services rendered in India 12,000
4. Profit from business in Nepal and controlled from there but received in India 4,000
5. Income from house property in UK received in India 5,000
6. Income from house property in Nepal 5,000
7. Past untaxed foreign income brought into India during the year
[Ans: `95,000; `90,000; `70,000]

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16. From the following particulars compute the total income of Mr. C.A for the assessment year
2019-20 if he is ordinary Resident, NOR or NRI:
`
1. Income from house property in India (computed) 32,000
2. Loss from house property in France (–) 60,000
3. Income from house property in England received there and deposited in Bank 90,000
there 2,60,000
4. Business income in India (–)
5. Loss from business in England 1,20,000
6. Profit from business in England which is controlled from them 1,00,000
7. Interest on debentures of an Indian company 10,000
8. Income from profession set up in India received in England for services 2,00,000
rendered in India
[Ans: `5, 12,000; `5, 02,000; `5, 02,000]

17. Following are the particulars of income of Mr. RTM for the Assessment Year 2019-20:
`
1. Income from business in Mumbai 80,000
2. Income from house property in Pune 20,000
3. Pension from former employer for service rendered in India but received in 24,000
U.K
4. Profit from business in UK but controlled from Mumbai. Out of this `20,000 1,60,000
were received in India 18,000
5. Dividend from an Indian company but received in U.K 60,000
6. Income from agriculture in Nepal: received there but later on remitted to 40,000
India 4,00,000
7. Interest on Bonds issued by UK Govt. out of which 50% is received in India 20,000
8. Past untaxed income of 2005-06 to 2006-07 brought in to India during 2008-
09
9. Income from house property in UK and donated there to a notified charitable
institution
[Ans: `4, 04,000; `3, 04,000; ` 1, 64,000]

18. Following are the incomes of Sri. Rungta for the previous year 2019-20:
`
1. Profit from the business in Bangalore 10,000
2. Income accrued in India but received in Japan 4,000
3. Profit from business in Canada but received in India 5,000
4. Income from house property Karachi received in India 4,000
5. Property from business established in England and deposited there the business
being controlled from India 20,000
6. Income from house property in America and deposited there 2,000
7. Past untaxed income brought into India during the previous year 10,000
[Ans: `45,000; NOR `43,000; `23,000]

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Exemptions from tax

Section Nature of Income
10(1) Agricultural income
10(2) Share from income of Hindu Undivided Family
10(2A) Share of profit from firm whose taxes are filed separately
Income received in a casual form not exceeding Rs.5,000 and in case of horse
10(3) race winnings, it should not exceed Rs.2,500
10(10D) Receipt from life insurance policy
10(16) Scholarship to meet cost of education
Allowances of MP and MLA. MLA’s allowance should not exceed Rs.600 per
10(17) month

Awards and rewards by central and state government, from approved awards
10(17A) by others and the approved rewards from central and state government.

Income of members of scheduled tribes of North Eastern States or Ladakh

10(26) region. The income should be arising from those regions itself.

10(26A) Income of Ladakh resident. His income can arise in Ladakh or outside India.
10(30) Subsidy from Tea Board under approved scheme

10(31) Subsidy from any concerned board under approved scheme of replantation

10(32) Income of minor clubbed with individual to a maximum of Rs.1,500

Dividend earned from Indian companies, income from Unit Trust of India,
10(33) Mutual funds and income from venture capital.
Profits earned in free trade zones, electronic hardware technology park or on
10(A) software technology park for up to 10 years.
Profits form complete export oriented undertakings, manufacturing articles or
10(B) computer software for 10 years.
Profits from newly established undertakings in IIDC or IGC in the North-
10(C) Eastern region for up to 10 years.

Interests, premiums, redemptions or any other payments that you get from
securities, bonds, capital investment bonds, relief bonds, etc. that are notified.
10(15)(i)(iib)(iic) The exemption limit is to the extent that is notified.

10(15)(iv)(h) Interest paid by public sector company on its bonds and debentures.

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Interest that the government pays on the deposits made by employees of

central and state government or public sector employees for their retirement
10(15)(iv)(i) under the notified scheme.
10(15)(vi) Interest received on notified gold deposit bonds.
10(15)(vii) Interest received on notified local authorities’ bonds

Leave travel assistance or concession received. The amount should not exceed
10(5) the amount payable by the central government to its employees.

Remuneration received by technicians who have specialised knowledge in

specific fields. Their service must commence after 31.3.93 and their tax should
be paid by the employer. The exemption limit is in respect of tax paid by
10(5B) employer for a period of up to 48 months.
Allowances and perquisites that the government provides to citizens of India
10(7) who provide their services abroad.

Remuneration received from foreign governments for duties in India provided

it is under cooperative technical assistance programmes. You also get
exemption for income arising outside India provided that the tax on that
10(8) income is paid by the government.

Death-cum retirement gratuity from government, payment made under

Gratuity Act, 1972 the amount must be as per section(2), (3) and (4) of that
10(10) Act and up to one and half month's salary for each completed year of service.

Commutation of pension from funds set by LIC under section 10(23AAB) and
government, statutory corporation, etc. Commutation of pension from
employers; when gratuity is payable, 1/3rd value of the pension and when
10(10A) gratuity is not payable, half of the pension.
Encashment of the earned leave that was unutilised from central or state
government and from other employers up to an amount equal to 10 months’
10(10AA) salary or Rs.1,35,360, whichever is less.
Retrenchment compensation, where the amount is either the amount under
section 25F(b) of Industrial Dispute Act, 1947 or the amount that the
10(10B) government notifies, whichever is less.
Amount received on voluntary retirement or on termination. The maximum
10(10C) limit is Rs.5 lakh.
Payment received under Provident Fund act, 1925 and other central
10(11) government notified bonds.
Payments received from recognised provident funds to the extent provided in
10(12) rule 8 of Part A of 4th schedule.
10(13) Payments received from approved superannuation fund.

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House rent allowance, the exemption is either the least of actual allowance,
actual rent in excess of 10% of the salary or 50% of salary in Mumbai,
10(13A) Chennai, Delhi and Calcutta and 40% in other places.
Prescribes special allowance or benefits granted to meet expenses that incur in
performing your duties, the exemption is granted to the extent of expenses that
10(14) actually incur.

10(18) Pension that includes family pension of recipients of notified gallantry awards.

CONTACT FOR :- 11TH , 12TH , BBA , B.COM , MBA , M.COM , BANKING , CAT 8839271225
 Prof. T RAMA KRISHNA RAO

Set Off and Carry Forward of Losses

The process of setting of losses and their carry forward may be covered in the following steps:

1. Inter-source adjustment under the same head of income

2. Inter-head adjustment in the same assessment year, this step is applied only if a loss cannot be set off under Step 1
3. Carry forward of a loss, this step is applied only if a loss cannot be set off under Step 1 & 2
Inter-source Adjustment – How made [Sec. 70]

The provisions of section 70 are given below –

General rule - 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 his income from any other source under the same head of income for the
same assessment year.

Exceptions – The following are the exceptions to the aforesaid rule –

i. Loss from speculation business - Loss in a speculation business can be set off only against the profit in a speculation
business.
ii. Long-term capital loss- Long-term capital loss can be set off only against long term capital gain.
iii. Loss from the activity of owning and maintaining race horses – Loss incurred in the business of owning and
maintaining race horses cannot be set off against income, if any, from any other source except income from such
business.
iv. Loss cannot be set off against winnings 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 or from gambling or betting of any form or nature.

Inter-head Adjustment – How made [Sec. 71]

The provisions of section 71 are given below –

General rule – 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.

Exceptions – The following are the exceptions to the aforesaid rule—

i. Loss from speculation business - Loss in a speculation business cannot be set off against any other income.
ii. Loss under the head ‘Capital Gains’—Losses under the head ‘Capital gains’ cannot be set off against any income except
income under the head ‘Capita gain’.
iii. Loss from the activity of owning and maintaining race horses – Loss incurred in the business of owning and maintaining
race horses cannot be set off against any other income.
iv. Business loss cannot be set off against salary income – From the assessment year 2005-06, loss from business or
profession cannot be set off against income under the head ‘Salaries’.
v. Loss cannot be set off against winnings 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 or from gambling or betting of any form or nature.
Carry forward of Loss – How to set off

If a loss cannot be set of 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. Under the Act, the
following losses can be carried forward:

i. Loss under the head ‘Income from house property [Sec. 71B]
ii. Loss under the head ‘Profit and gains of business or profession’ [Sec. 72 & 73]
iii. Loss under the head ‘Capital gains’ [Sec. 74]
iv. Loss from the activity of owning and maintaining race horses [Sec. 74A]
Carry Forward & Set-off Loss

CONTACT FOR :- 11TH , 12TH , BBA , B.COM , MBA , M.COM , BANKING , CAT 8839271225
 Prof. T RAMA KRISHNA RAO
Where in any assessment year, the loss under any head (except salaries and income from house property) is not adjusted as per
rules, the same shall be carried forward and set-off against the income of subsequent years.

1. Loss under the head “House Property”: -- Loss under the head income from House Property can be carried forward with
effect from assessment year 1999-2000 for 8 succeeding previous years to be set off from income under the head ‘House
Property’ only. House property loss of assessment year 1998-99 or related to any earlier year cannot be carried forward and
set-off in future years.
2. Business Loss [Section 72 (1): -- If the whole business loss cannot be set-off because of insufficiency of income under other
heads in the same assessment year, such business loss shall be carried forward and set-off against the income of any business
or profession carried on by the assessee and assessable in that assessment year. A business loss can be carried forward over 8
subsequent assessment years and set-off wherever profits are available. A carried forward non-speculation business loss can
be set-off against the income of any business (including speculation business profit) carried on by the assessee.
3. Unabsorbed depreciation: -- With effect from A/Y 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 C/F unabsorbed depreciation, and then following order should be followed for set off.

Firstly current depreciation

Secondly brought forward business loss

Thirdly brought forward/unabsorbed depreciation

4. Loss of speculation business: -- 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 four assessment
years immediately succeeding the assessment year for which the loss was computed.
If the assessee leaves one type of speculation business and its unabsorbed loss could not be set-off against the income
of any other speculation business which the assessee may start, the carry forward loss of speculation business which is
discontinued is eligible for setting off against the assessee’s income of another speculation business.

Speculation loss which remains unadjusted can be carried forward to succeeding previous year to be set off only from
speculation gain. Till A/Y 2005-06 it could be carried forward for 8 succeeding previous years but with effect from the 1-4-
2006 speculation loss shall be carried forward for 4 succeeding previous years.

Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is
periodically or ultimately settled, otherwise than be the actual delivery or transfer of the commodity or scrips.
5. Loss under the head capital gains
A. It can be carried forward for 8 succeeding previous years to be set off only from income under the head Capital Gains in
following manner:
i. Short-term Capital Loss can be set off from either short term capital gain or long-term capital gain.
ii. Long term capital loss can be set off only from long term capital gain.
B. No loss under the head capital gain shall be carried forward for more than 8 assessment year succeeding the assessment
year in which such loss was first computed [Section 74(2)]
Loss under the head other sources’ [Section 74A(3)]: -- Under the head “other sources” only expenses on maintenance of
horses can be set-off from income of same activity if any. If it still remains unadjusted, such loss can be carried forward for 4
succeeding previous years to be set off only from stake/prize money received on account of winning a position by these horses in
races.

CONTACT FOR :- 11TH , 12TH , BBA , B.COM , MBA , M.COM , BANKING , CAT 8839271225
 Prof. T RAMA KRISHNA RAO

Practical Problems:
1. From the particulars given below, computes the total income for the previous year 2018-19:

`
1. Income from let out house (computed) 6,000
2. Annual rental value of his self-occupied house 4,000
3. Municipal taxes 400
4. Profit from electric goods business after dep. 10,000
5. Profit from agency business 3,000
6. Speculation gain from gold 2,000
7. Long-term capital gain from land 7,000
8. Short-term capital gain 2,000
Following losses have been brought forward from 2017-18 previous year:
1. Loss from electric goods business 6,000
2. Loss from an agency business 1,000
3. Speculation loss from silver 4,000
4. Unabsorbed Depreciation 1,000
5. Long-term capital loss (land) 4,400
6. Short-term capital loss 3,000
[Hints: house property; Let out ` 6000; self occupied exempted; business income ` 5000; long term capital gain ` 1600; total
income ` 12600; speculation unabsorbed loss ` 2000 C/F]

2. Mr. Singh, a resident of India, submits the following particulars of his income for the assessment year 2019-20:

`
1. Income from house let out (computed) 9,500
2. Profit from radio business 19,600
3. Profit from electric business 1,800
4. Speculation income 1,900
5. Short-term capital gains 3,200
6. Long-term capital gain 9,250
7. Current year’s depreciation relating to electric goods business is ` 2500
The following items have been brought forward from preceding assessment year
1. Loss from cycle business discontinued during the previous year 2016-17 3,900
2. Loss from electric business 2,700
3. Loss from radio business 1,900
4. Unabsorbed depreciation of electric business 1,000
5. Unabsorbed family planning expenditure 2,600
6. Speculation loss 3,200
7. Short-term capital loss from the year 2015-16 4,100
8. Long-term capital loss from the year 2016-17 6,450
You are required to compute his gross total income and deal with the carry forward of loses.

[Hints: income from house property ` 9500; unabsorbed exp. on family planning cannot be set off, loss from discontinued
cycle business can be set-off; business profit after setting-off loss from radio business loss of firm, unabsorbed depreciation, `
9400; speculation loss of ` 1300 to be C/F. Taxable long term capital gain ` 1900; total income ` 20800]

3. Mr. Ram Patel submits the following information of his incomes and losses for the year ending 31-3-2019.

`
Salary income (computed) 24,000
Income from house property: A (income) 10,000
B (loss) 40,000
C (self occupied) loss 28,000
Income from business:
 Cloth business –profit 10,000
 Hardware business –loss 12,000

CONTACT FOR :- 11TH , 12TH , BBA , B.COM , MBA , M.COM , BANKING , CAT 8839271225
 Prof. T RAMA KRISHNA RAO
 Speculation –profit 12,000
 Speculation loss 17,000
Capital gains:
 Short-term gain 8,000
 Short-term loss 24,000
 Long-term gain 8,000
Other sources:
 Income from betting 12,000
 Loss from card games 6,000
 Income from card games 9,000
 Interest on securities gross 8,000
[Hints: Speculation loss to be C/F ` 5000. Capital loss to be C/F ` 8000. Other sources income ` 29000. Business loss to be set
off from interest on securities. H.P loss of ` 58,000 to be set off from salary income and interest as securities. Balance loss
from H.P to be C/F ` 28000 GTI (only casual income) ` 21000]

4. Ram a partner of a firm and also having several sources of income, furnishes the following particulars in respect of his
assessment for the year 2019-20:

`
1. Income from house properly(computed) 6,000
2. Interest on Govt. securities 2,000
3. Profit and gains of business or profession:
Business A: Trading profits 10,000
Depreciation 6,000
Business B: Trading profits 50,000
Depreciation 12,000
4. Income from other sources:
Dividends from cooperative society 2,000
Interest on loan taken by Ram for purchase of share of cooperative society on
which the dividend was earned 600
5. Capital gains: Short-term capital gains 12,000
It is found that unabsorbed depreciation relating to Business B, amounting to ` 15000 as brought forward from the
assessment year 2012-13. From business A. unabsorbed loss of ` 20000 is brought forward from the assessment year 2012-13.
Compute gross total income of Ram for assessment year 2014-15.

[Hints: H.P. income ` 6000 profits and gains ` 7000 capital gains ` 12000 other sources ` 3400. GTI = ` 28,400]

5. The particulars of assessment years 2018-19 and 2019-20 are as under:

2018 - 19 2019-20
` `
Income from house properly profits and gains from business or profession: +8000 +8000
Manufacturing business: Trading Profit or loss before depreciation -- 15000 +36000
Depreciation 32000 23000
Speculative transactions 6000 -- 8000
Income from other sources 5000 6000
Capital gains: Short-term loss Nil -- 5000
[Hints: Assessment year 2018-19 total income Nil unabsorbed dept. to be C/F ` 28000. assessment year 2019-20 total income
nil unabsorbed dep. C/F ` 1000; speculation loss of ` 8000 to the C/F STC loss C/F ` 5000]

6. Followings are the particulars of income and loses of Mr. Prasad calculate total income for the assessment year 2019-20:

`
Profit of business A 80,000
Loss from business B 20,000
Loss from speculation Business C 60,000
Short-term capital gain 50,000
Long-term capital loss 20,000
Interest on securities 24,500
Income from owning and maintaining race horses 15,000
Income from lotteries (gross) 20,000
Income from card games 16,000

CONTACT FOR :- 11TH , 12TH , BBA , B.COM , MBA , M.COM , BANKING , CAT 8839271225
 Prof. T RAMA KRISHNA RAO
Loss from gambling 6,000
Mr. Prasad has the following brought forward losses:
 Long term capital loss of the A.Y. 2016-17 4,000
 Short term capital loss of the A.Y. 2017-18 10,000
 Unabsorbed depreciation of the A.Y. 2015-16 25,000
 Loss from owning and maintaining race horses
Of the assessment year 2014-15 10,000
Of the assessment year 2015-16 18,000
Brought forward loss of business A of the assessment year 2012-13 18,000
[Hints: profit and gains ` 17000; short term capital gains ` 40000 other sources ` 60500 GTI ` 1, 17,500; Loss on activity of
race horses for A/Y 2011-12 cannot be set off; for 2012-13 to be set off ` 15000; balance loss cannot be c/f as 4 yuears are over
in A.Y 2016-17. Loss from gambling cannot be set off; speculation loss to be C/F ` 60000 LTC loss to be C/F ` 20000 and `
4000]

7. The assessment of M co Ltd., Indian company, for the years 2018-19 and 2019-20 show the following results:

2018-19 ` 2019-20 `
Interest on securities --2000 2000
Income from house property 8000 8000
Profit and gains of business or profession:
Dealing in fruits --30000 --12000
Manufacturing glass:
Profit before depreciation 50000 140000
Depreciation 80000 75000
Speculative transactions 60000 --9000
Income from other sources:
Bank interest 2000 5000
Short-term capital gains Nil 25000
Compute the net assessable results for each of the two years giving full reasons for your workings.

[hints: A. Y. 2018-19 income nil, glass business profit ` 50,000. current depreciation adjusted ` 50000, C/F ` 30000 fruit
dealing business loss adjusted upto ` 6000 from speculation gain, ` 8000 from income of all other heads C/F ` 16000.

A. Y. 2019-20, H.P income ` 8,000 profits and gain ` 7000; capital loss ` 25,000 to be carried forward. Other source `
7000 total income ` 22,000. Speculation loss to be carried forward ` 9000]

8. From the following particulars computes the total income of Mr. David for the Assessment year 2019-20:

• Loss from house property ` – 8000

• Short term capital gain on sale of shares ` 95000
• Long term capita loss on sale of bonds ` - 85000
• Other sources : interest on government securities `18000
The assessee has unabsorbed depreciation of ` 35000 being brought forward from 2011-12. Assessee had closed the business and
all the assets have disposed of

[Hint: GTI `70000, house property loss to be adjusted from other heads; unabsorbed depreciation to be set off from any
other income LTC loss to be C/F `85000]

CONTACT FOR :- 11TH , 12TH , BBA , B.COM , MBA , M.COM , BANKING , CAT 8839271225
 Prof. T RAMA KRISHNA RAO

DEDUCTIONS FROM GROSS & TOTAL

INCOME
Allowed Limit
Section
Deduction on (maximum)
Investment in PPF
– Employee’s share of PF contribution
– NSCs
– Life Insurance Premium payment
– Children’s Tuition Fee
– Principal Repayment of home loan
– Investment in Sukanya Samridhi Account
– ULIPS
– ELSS
– Sum paid to purchase deferred annuity
– Five year deposit scheme
– Senior Citizens savings scheme
80C – Subscription to notified securities/notified Rs. 1,50,000
deposits scheme
– Contribution to notified Pension Fund set up
by Mutual Fund or UTI.
– Subscription to Home Loan Account scheme
of the National Housing Bank
– Subscription to deposit scheme of a public
sector or company engaged in providing housing
finance
– Contribution to notified annuity Plan of LIC
– Subscription to equity shares/ debentures of an
approved eligible issue
– Subscription to notified bonds of NABARD
For amount deposited in annuity plan of LIC or
80CCC any other insurer for a pension from a fund –
referred to in Section 10(23AAB)
Employee’s contribution to NPS account
80CCD(1) (maximum up to Rs 1,50,000) –
Employer’s contribution to NPS account Maximum up to 10%
80CCD(2)
of salary
80CCD(1B) Additional contribution to NPS Rs. 50,000
80TTA(1) Interest Income from Savings account Maximum up to 10,000

CONTACT FOR :- 11TH , 12TH , BBA , B.COM , MBA , M.COM , BANKING , CAT 8839271225
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Exemption of interest from banks, post office,
80TTB etc. Applicable only to senior citizens Maximum up to 50,000
For rent paid when HRA is not received from Least of :
employer – Rent paid minus 10%
80GG of total income
– Rs. 5000/- per month
– 25% of total income
Interest on education loan Interest paid for a
80E
period of 8 years
80EE Interest on home loan for first time home owners Rs 50,000
Medical Insurance – Self, spouse, children – Rs. 25,000
Medical Insurance – Parents more than 60 years
80D old or (from FY 2015-16) uninsured parents – Rs. 50,000
more than 80 years old
Medical treatment for handicapped dependent or
payment to specified scheme for maintenance of – Rs. 75,000
80DD handicapped dependent
– Disability is 40% or more but less than 80% – Rs. 1,25,000
– Disability is 80% or more
Medical Expenditure on Self or Dependent – Lower of Rs 40,000
Relative for diseases specified in Rule 11DD or the amount actually
paid
80DDB – For less than 60 years old – Lower of Rs 1,00,000
or the amount actually
paid
– For more than 60 years old
Self-suffering from disability : – Rs. 75,000
– An individual suffering from a physical
80U disability (including blindness) or mental – Rs. 1,25,000
retardation.
– An individual suffering from severe disability
Contribution by companies to political parties Amount contributed
80GGB (not allowed if paid in
cash)
Contribution by individuals to political parties Amount contributed
80GGC (not allowed if paid in
cash)
Deductions on Income by way of Royalty of a Lower of Rs 3,00,000
80RRB Patent or income received

CONTACT FOR :- 11TH , 12TH , BBA , B.COM , MBA , M.COM , BANKING , CAT 8839271225