Set off of losses

Provision of section 70 to 80 of IT Act involves following three steps

1. Inter source adjustment / Intra source adjustment

2. Inter head adjustment in same AY

3. Carry forward of loss to the subsequent AY to claim it as set off if it could not be set off under step 1 and step 2

Set off of losses CY provisions• Set off of loss from one source against

income from another source under the same head of income (sec.70) –(except capital gain)

1. Exception 1 – loss from speculation business included in “PGBP” head. Meaning of speculative transaction- contract for sale or purchase of any commodity including stock and shares, is periodically settled otherwise than by the actual delivery.

2. Exception 2- Loss from the activity of owning & maintaining race horses included in “Other source” head

Exceptions to Intra head set off losses

3. Exception 3 – Loss on account of lottery etc can not be set off against winning from lotteries, crossword puzzles, card games etc

4. Exception 4 – Loss from a source which is exempt- can not be adjust with any other source within same head

5. Exception 5 ST cap.loss – can be adjust against any cap.Gain/loss. However LT cap loss can be adjust against LT cap Gain/loss

6. Loss arising from the purchase and sale of securities not to be allowed in certain cases (sec.94(7))- to the extend of loss does not exceed the amount of dividend or income received on such securities or units of MF shall be ignored for the purpose of computing taxable income

7. Bonus stripping in case of units - provision says, to the person who acquired the bonus units in such tax avoidance transaction, if any loss arising out of sale & purchase of such unit, will not be included in computation of total income

Decided cases on set off losses in CY income

• Benefits u/s 70 can be claimed even in the case of clubbing of income u/s 64 e.g the loss of an individual is eligible for set off against clubbed income of minor child

• If there is profit from one source of income and loss from another, the assessee has no option but to set off the loss against such profits if it is permissible under section 70

Set off of loss – inter head (sec.71)• After considering intra head adjustment, if

any loss is there in one head that can be adjust against income of any other head except – “capital gain”– Loss under head capital gain is not allowed to

set off, but to carry forward– Loss under the head PGBP can not be

allowed to set off against income from salaries

In following cases inter head adjustment is not permissible

1. Loss from a speculation business

2. Loss from the activity of owning & maintaining race horses

3. Loss of lottery etc can not be set off against winning from lotteries, crossword puzzles, card games etc

4. Loss from a source which is exempt

Carry Forward & set off of lossesFollowing losses are allowed to Carry Forward

1. House Property Losses

2. Business Loss

3. Speculation Loss

4. Capital Loss

5. Loss on account of owning and maintaining race horses

Compulsory filing of loss returns (sec.80) Except in case of house property And Unabsorbed depreciation

Carry forward of lossesC/F of loss from House property for 8 years

is permissible to be adjusted against future house property income

Business loss to be carried over up to 8 years with following conditionsBusiness loss can be adjusted only against

business incomeBusiness in respect of which a loss is incurred

may or may not be continuedLosses can be set off only by the assessee

who has incurred loss except

Provisions related to business lossesLosses incurred in following case can be adjusted

even if the person is not same for set offInheritance ( unabsorbed Depreciation not

allowed)AmalgamationSuccession of proprietary concern or firm by a

CompanyDemerger

Period of Carry forward of 8 years, in following , carry forward timing would be indefiniteUnabsorbed depreciationUnabsorbed capital expenditure of scientific

researchUnabsorbed expenditure on family planning

Order of set off of business losses from business incomeCY depreciation CY capital exp on scientific research and CY

family planning B/F business lossUnabsorbed depreciationUnabsorbed capital expenditure on scientific

researchUnabsorbed expenditure on family planning

Return of loss

Set off and carry forward of Speculation Loss

• Set off against only speculation income in succeeding years up to 4 years

• Same speculation business is not mandatory

• Business of sale and purchase of shares of companies would be considered as speculation business except– Delivery of shares are takes place physically– Investor is banking or finance companies

Carry forward of losses of capital loss

• Net result of capital gain head (whether short term or long term) – CF separately

• ST capital loss can be set off in succeeding 8 years either from STCG or LTCG

• LT capital loss can be set off in succeeding 8 years only from Long Term capital gains

Loss from the activity of owning and maintaining race horse

• A person incurring loss from such activity means expensed for– Maintaining the horses , where no stake

money is there or– Loss = (stake money – Maintenance Exp)

• Such loss could be CF and set off against the same income only , for the period up to 4 years.

Special point to be consider

• Where the losses incurred are not set off against the income of the immediately succeeding year/years as the case may be, it was held that it can not be set off in later date (Tyresoles (India) V CIT)

Set off incase of change in constitution

Unabsorbed depreciation can be set off for indefinite period incase,

1. Amalgamating company to amalgamated company

2. Demerged co. to resulting co.

3. Firm or proprietary concern succeeded by a co. to successor co.

4. Banking co. to banking institution

Set off incase of change in constitution

Unabsorbed business loss can be carry forward up to 8 years from the year of amalgamation/ demerger /change in constitution in case of

1. Amalgamating to amalgamated

2. Demerged to resulting company

3. Firm or propriety concern to Succeesor company

Conditions to be satisfied for carry forward & satisfied in case of amalgamation

Amalgamation should be of –

1. A company owning an industrial undertaking or a ship or a hotel with another co

2. A banking company

3. PSUs engaged in business of operation of aircrafts

Conditions to be satisfied by amalgamating company

• The unabsorbed business loss are from the main activity of said company and remain unabsorbed for preceding 3 or more years

• As on date of amalgamation, amalgamating company has held continuously 75% of the book value of fixed assets held by it two years prior to the date of amalgamation

Conditions to be satisfied by amalgamated company

• The company should holds continuously for a minimum period of 5 years -75% of book value of fixed assets

• The company should continuous the business of amalgamating company for at least 5 years

• Any other conditions to be satisfied if require to ensure genuine amalgamation