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Set Off & Carry Forward of Losses: Lecture Notes

1. The document discusses the rules around set off and carry forward of losses under the Indian Income Tax Act, including inter-source adjustment within a head of income (Section 70), inter-head adjustment in the same assessment year (Section 71), and carry forward of losses. 2. It provides examples of setting off losses from one source/head against income from another source/head in the same year. It also outlines the exceptions and time limits for carrying losses forward to future years for different heads of income. 3. Key points covered include setting off speculation losses only against speculation income, an 8-year limit for carrying forward business and short-term capital losses, and no time limit for carrying forward un

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107 views

Set Off & Carry Forward of Losses: Lecture Notes

1. The document discusses the rules around set off and carry forward of losses under the Indian Income Tax Act, including inter-source adjustment within a head of income (Section 70), inter-head adjustment in the same assessment year (Section 71), and carry forward of losses. 2. It provides examples of setting off losses from one source/head against income from another source/head in the same year. It also outlines the exceptions and time limits for carrying losses forward to future years for different heads of income. 3. Key points covered include setting off speculation losses only against speculation income, an 8-year limit for carrying forward business and short-term capital losses, and no time limit for carrying forward un

Uploaded by

santoshsa_1987
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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SET OFF & CARRY FORWARD OF LOSSES

Lecture Notes

1
WHY SET OFF & CARRY FORWARD
 IF THERE IS A LOSS FROM ONE OR MORE
SOURCES UNDER ONE OR MORE HEADS
OF INCOME

 RULES ARE COVERED U/S 70 TO 80

2
MODE OF SET OFF & CARRY FORWARD
STEP 1- INTER SOURCE ADJUSTMENT UNDER
THE SAME HEAD OF INCOME (SEC 70)

STEP 2- INTER HEAD ADJUSTMENT IN THE


SAME ASSESSMENT YEAR (SEC
71)

STEP 3- CARRY FORWARD OF A LOSS

3
INTER SOURCE ADJUSTMENT (SEC 70)
If there is a loss in respect of any source under
any head of income for any Asst year then it can
be set off under any other source under the same
head

EXAMPLES
Business A 100000 House Property X 75000
Business B 70000 House Property Y (40000)
Business C (120000)
Net Result 35000
Net Result 50000
4
INTER SOURCE ADJUSTMENT (SEC 70)
EXCEPTIONS:-
 Loss from speculation business

 Long term capital loss

 Loss from activity of owning & maintaining

race horses
 Loss cannot be set off against winnings from

lotteries, crossword puzzles, card game etc.

5
INTER HEAD ADJUSTMENT (SEC 71)
When there is loss in respect of any head of
income for any assessment year then it can
be set off against income from other heads

EXAMPLE
Salary Income 80000
House Property (30000)

Net Result 50000

6
INTER HEAD ADJUSTMENT (SEC 71)
EXCEPTIONS:-
 Loss in a speculation business

 Loss under the head capital gains

 Loss from activity of owning &maintaining race

horses
 Loss cannot be set off against winnings from

lotteries, crossword puzzles , card game etc.


 Business Loss cannot be adjusted against Salary

Income

7
OTHER POINTS
 Before adjusting loss u/s 71, one has to set off the loss
u/s 70
 Barring aforesaid four cases, any loss can be set off
against income under other heads of income for the
same year.
 No order of priority is given in the Act.
 (Barring the cases in sec 71) In all other cases a loss
has to be first adjusted against available income under
other heads of income.
 If Income from a particular sources is exempt from Tax
- loss from such source cannot be set off against
income chargeable to tax.
8
1. Rs.
Income from house property 170000
Profits & Gains of B or P (150000)

Income from other sources


(147000)
(being interest on debentures
which were purchased out
of borrowed money)

2. Current Year Next Year


Business (100000) 800000
Income

Long Term C. G. 230000 300000


9
CARRY FORWARD OF LOSS
Under the act following losses can be carried forward:

 Loss under head Income from ‘House Property’ (sec


71B)
 Loss under head ‘P & G of B or P’ (sec 72 & sec 73)
 Loss under the head ‘Capital Gains’ (sec 74)
 Loss from activity of owning & maintaining race horses
(sec 74A)

Other remaining losses cannot be carried forward.


10
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.

 If the assessee carries on both speculative and


non speculative transaction --- income or loss ---
should be determined separately and distinctly.

 Business expenditure incurred – allocated on a


reasonable basis.
11
Exceptions :
Contract in respect of -
•Raw material or merchandise
•Stocks and shares by a Guard against
price fluctuation
dealer or investor
•Member of forward market or a
stock exchange in the course of
jobbing or arbitrage
Speculative business in case of a company:
company
Any part of the business of a company consists in the
purchase and sale of shares of other companies, such
company shall be deemed to be carrying on a speculative
business to the extent to which the business consists of
purchase and sale of such shares.
12
SECTION 73 DOES NOT APPLY TO THE
FOLLOWING COMPANY

 GTI consist mainly of income chargeable under head


Income from HP, CG, Income from Other Sources.

 Banking or of granting loans and advances or in units


of UTI.

Explanation to sec 73 is not applicable if shares are


purchased as Investments or if the assessee –
company is not engaged in the business of purchase
and sale of shares.
13
CARRY FORWARD & SET OFF OF
SPECULATION LOSS
 Speculation loss can be set off only
against speculative income
 Loss can be carried forward for 8 yrs.
 Continuity of business not necessary.
 Filing of Return of loss should be
submitted in time

14
OTHER POINTS TO BE NOTED
 Banned items
 Entered into on behalf of principal – non
speculative loss of agent.

 Transaction there is a breach of contract


and on a dispute between parties damages
are awarded as compensation by a
arbitration award.
15
CARRY FORWARD & SET OFF OF BUSINESS
LOSS OTHER THAN SPECULATION LOSS
(SEC 72)
 Loss carried forward, can be set off only against
business income
 Losses can be carried forward by the person who
incurred the loss (exceptions to rule)
 Loss can be carried forward for 8 yrs
 Return of loss should be submitted in time
 Continuity of business not necessary
 Carry forward of unabsorbed depreciation, capital
expenditure on scientific research & family planning
expenditure

16
CARRY FORWARD OF UNABSORBED
DEPRECIATION (Sec 32(2))
 No time limit is fixed for the purpose of carry
forward.
 In the subsequent year(s) it can be set off against
any head. except winnings from lotteries,
crossword puzzles.
 Continuity of business not relevant.
 Following order of priority is followed.
(1) Current Depreciation
(2) Brought Forward Business loss
(3) Unabsorbed Depreciation
17
CARRY FORWARD & SET OFF OF
LOSS & DEPRECIATION SEC (72A)
Depreciation and Business loss can be
carried forward by a person who has
incurred the loss

Exceptions-
 Amalgamation of Companies
 Demerger
 Conversion of a proprietary concern/firm
into company

18
CARRY FORWARD & SET OFF OF LOSS
FROM HOUSE PROPERTY (SEC 71B)

 Applicable from Asst yr 1999-2000


 Loss can be carried forward for 8 yrs
 Return of loss need not be submitted in time

19
CARRY FORWARD & SET OFF OF LOSS
FROM ACTIVITY OF OWNING &
MAINTAINING RACE HORSES (SEC 74A)
 Continuity of Business necessary
 Loss can be carried forward for 4 yrs
 Return of loss should be submitted in time
 Not applicable for other race animals
 Allowed only to the extent of stake falls short
of revenue expenditure

20
CARRY FORWARD & SET OFF OF
CAPITAL LOSS (Sec 74)
Nature of Loss No. of Set off Against
Years
A) Short term 8 Any income under the head
capital Loss “capital Gains”
B) Long term 8 Long term capital Gain
capital Loss

 Return of loss should be submitted in time

21
THANK YOU

22

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