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set-off-and-carry-forward-of-losses

 

Set off and Carry forward of losses

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As per Income Tax Act, a person can “set off and carry forward of losses” which they have been incurred in any financial year. This provides more relief to the person who has incurred the losses and relaxed to the extent.

Introduction about Set off of losses-

Set off of losses means adjustment of losses against the profit from other source of income in the same financial year. If the profits are insufficient to set off the losses, they can be carried forward to the next assessment years as under-
  • Inter Source Adjustments (Section 70)
  • Inter head Adjustments (Section 71)
  • Carry forward to next Assessment years

Inter Source Adjustment (section 70)- Under inter source adjustment, losses from one source to be set off from the profit of any other source under the same head. There are some cases where inter source adjustment is not possible-
  • Long term capital losses- Long-term capital losses can be set off only against long-term capital gains but short-term capital losses can be set off against both the short-term and long-term capital gains.
  • Speculative Business loss- Speculative business losses can be set off against the profits of any other speculative Business. It cannot be set off against any other Business or Professional Income. But losses of business or profession can be set off against the profits of speculation Business.
  • Loss from owning and maintaining race horses- Loss from owing and maintain race horses can be set off only against the income from owning and maintaining race horses.
  • Loss of specified business under Section 35AD- Losses from specified business under section 35AD can be set off only against profits from such specified business only but the losses from other business can be set off against profits from specified business as above.

Inter Head Adjustments- (section 71) - Under inter head adjustment, If it is not possible to set off of losses under inter source adjustment he can set off the losses under inter head adjustments- The loss under one head can be set off against the profit of another head of Income in that financial year.
  • House Property Losses- House Property Losses can be set off against profits from other heads. It can be set off against salary income, Business income, Income from capital gain, and income from other sources.
  • Non Speculative Business Losses- Non speculative Business Losses can be set off under any other head except income from salary. I.e. means it can be set off from income from house property, income from capital gain and Income from other sources.There have some exceptions of the following losses which cannot be set off under inter head adjustments.- 1. Speculative Business Losses. 2. Specified Business Losses. 3. Capital Gain Losses (Both short term capital loss and long term capital loss). 4. Losses from owning and maintaining race Horses.

Carry forward losses- If it is not possible to set off losses under inter source adjustments and inter-head adjustments, he can carry forward the losses to the next assessment years.It must be in your mind that the carry forward losses can be set off only against the profit from that head of income. It will be carry forward if you have file your return within the due dates as prescribed under section 139(1), except the losses arising out of house property. The following losses can be carried forward to next assessment years.
  • House Property Losses (section 71B)- From financial year 2017-18 on wards loss of maximum of Rs. 2,00,000 is allowed to be set off with Income from other heads. The amount which is not set off shall be carried forward to next eight years adjusted under the same head. Earlier there was no restriction.
Example
Mr. X has salary income of Rs. 5,00,000, Income from other sources Rs. 3,00,000 and Income from House property is -4,41,400 during the financial year 2017-18. What will be his taxable income and what amount of loss which can be set off or which can be carry forward to next assessment years?. He has also invested Rs. 1,50,000 under section 80C.
Answer-
Particulars Amount (Rs.)
Income from Salary 5,00,000
Income from Other Sources 3,00,000
Income from House Property -2,00,000*
Gross Total Income 6,00,000
Less: Deduction under Section 80C 1,50,000
Total Taxable Income 4,50,000
*Total losses for the year financial year 2017-18, under the head of “Income from House Property is Rs. -4,41,400, However, form FY 2017-18, such set off of losses has been restricted to Rs 2 lakhs from income of other heads in a financial year and balance amount is carry forward to next eight assessment years and will be adjusted under the same head. So, he can set off only Rs. 2,00,000 from other head of income in the financial year 2017-18 and balance Rs. -2,41,400 will be carry forward to next 8 assessment years or will be set off under the same head of income i.e. Income from house property.
  • Non-Speculative Business Losses (section 72)- Non-speculative business losses can be carried forward up to 8 years from the financial year in which the loss has been incurred. These losses can be set off only against the business income.
  • Speculative Business Losses (section 73) - Speculative business losses can be carried forward up to 4 years from the financial year in which the loss has been incurred These losses can only be set off only against speculative business income.
  • Specified Business Losses (section 73A)– Specified business losses can be carried forward for any number of years. These losses can be set off only against the income from specified businesses.
  • Long-term/Short-term capital losses (section 74) - Long-term/short-term capital losses can be carried forward up to 8 years from the financial year in which the loss has been incurred. Long term capital losses can be set off only against the long-term capital gains but the short-term capital losses can be set off against both the short-term as well long-term capital gains.
  • Loss from owning and maintaining race horses (section 74A) - Loss from owning and maintaining race horses can be carried forward up to 4 years from the financial year in which the loss has been incurred. These losses can only be adjusted against the income from owning and maintaining race horses.

SET-OFF AND CARRY FORWARD OF UNABSORBED DEPRECIATION (Section 32 (2)- UnAbsorbed Deprecation (Section 32(2)- Current year depreciation shall be allowed to be set off against any income assessable for that Assessment Year. Depreciation to the extent not set off shall be carried forward to the next year and set off against the income under any head (other than salary).
Priority of set-off
  • Current Year Depreciation
  • Brought forward Business Losses
  • Brought forward depreciation.

Note the following points-
Depreciation shall be allowed to be carried forward even if business has been discontinued. The unabsorbed depreciation can be carried forward indefinitely. Unabsorbed deprecation can be carried forward and set off even the return is filled after the due date or return is not filled. Unabsorbed deprecation can be carried forward if the assessee is the same i.e. the assessee who claimed deprecation



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