Introduction

A person can set off and carry forward the income losses incurred as per the Income Tax Act 1961; it is a big boon to a Person because it plays an important role on the financial condition of a Person who has incurred such Losses. So the legislature affected the provisions of set-off and carry forward of income losses so that an assessee would not have to bear the burden of paying taxes in the case of losses. If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax.

Note: You cannot be set off your losses from the exempt source of Income against profit from any taxable source of Income, and no losses can be set off against casual income i.e. crossword puzzles, winning from lotteries, races, card games, betting etc.

Meaning of Set off and Carry forward

Set off means adjusting the losses against the profit of that financial year. Losses can be carried forward to next Assessment Years if there are no adequate profits subject to the conditions stated in the Act.

Income losses Intra-head Set off

Under Section 70 of Income Tax Act, 1961, if the taxpayer has incurred some loss then the taxpayer is allowed to adjust it from any other source of income under the same head. This process is called intra-head adjustment, e.g. Adjustment of loss from business A against profit from business B.

An Assessee cannot do intra-head adjustment of loss in following cases:

  • Speculative Business Losses

Speculative business losses cannot be set off against any income other than income from the speculative business. It is not allowable to set off speculative Loss against any other Business or Professional Income but the non-speculative business loss can be set off against income from the speculative business.

  • Long-term capital Loss

It cannot be set off against any income other than income from long-term capital gain but the short-term capital loss can be set off against long-term or short-term capital gain.

  • Income Losses from owning and maintaining race horses

    Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.

  • Income Losses of specified Business 

    Under section 35AD- Income losses of specified business cannot be set off against any other income except income from the specified business but loss from other business can be set off against the profit of the specified business in that financial year.

Income Losses Inter-head Set off

Inter –head adjustment is the next step of set off of  losses, Under Section 71 of Income Tax Act, 1961 if the taxpayer has incurred loss under one head of income and is having income under other head of income, and then the taxpayer can adjust the loss from one head against income from other head.

  • House Property Income Losses

House Property Income Losses can be set off against profits from other heads. It can be summoned against salary income, Business income, Income from capital gain, and income from other sources except for casual income.

  • Non-Speculative Business Losses

Non-speculative Business Losses can be set off under any other head except income from salary i.e., it can be done from income from house property, income from capital gain and Income from other sources.

In the following cases, losses cannot be set off under inter-head adjustments.

  1. Speculative Business Loss.
  2. Specified Business Loss.
  3. Capital Gain Income Losses
  4. Income Losses from owning and maintaining race Horses

Income Losses Carry forward

After making intra-head and inter-head adjustments it may happen that the income losses remains unadjusted then such unadjusted loss can be carried forward to next year for adjustment against subsequent year income. There are different provisions have been framed for carrying forward of loss under different heads of income under the Income-tax Law.

  • House Property Income Losses

Under (Section71B) of Income Tax Act,1961 An Assessee can carry forward the income losses incurred under the head house property up to 8 years immediately succeeding the Assessment year in which the loss has incurred. It can be adjusted only against House property Income loss. In this case, an Assessee can file the belated return.

  • Non-Speculative Business Losses

Under Section 72 of Income Tax Act,1961 An Assessee can carry forward Non-speculative business loss up to 8 years immediately succeeding the Assessment Year in which the loss has incurred then he  must file ITR within due date prescribed under section139 (1) of Income Tax Act 1961, Otherwise he cannot carry forward the losses. It can be set off only against business income.

  • Speculative Business Losses

Under Section 73, Income Losses in speculative businesses can be carried forward up to 4 years immediately succeeding the Assessment year in which it has incurred.

An Assessee must file the Income Tax Return within due date prescribed to carry forward the losses from speculative Business and can be adjusted only against income from speculation Business.

  • Specified Business Loss

Under Section 73A, Income Losses in Specified business loss can be Carry forward subject to the following conditions:

(1) Income loss in respect of any specified business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business.

(2) Income loss in specified business has not been wholly set off, so much of the loss as is not so set off or the whole loss where the assessee has no income from any other specified business shall be carried forward to the following assessment year.

(i) It shall be set off against the profits and gains, if any, of any specified business, carried on by him assessable for that assessment year; and

(ii) If the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on..

  • Capital gain income losses

If an individual is unable to set off the capital loss in the same year, both Long Term loss and Short Term loss can be carried forward immediately for 8 Assessment Years. Capital Losses from a business are allowed to be carried forward and carrying on of this business is not compulsory.

Brought Forward Income losses 

Brought forward income losses or Unabsorbed depreciation is like if the company suffer a loss before claiming depreciation, then the entire amount of depreciation is unabsorbed depreciation. However, if the company suffers a loss as a result of depreciation amount than the business loss will be nil and balance of depreciation amount will unabsorbed depreciation.

Example

It can be observed that Arjun’s  business income before claiming deduction under section 32 on account of depreciation is Rs. 84,000 and depreciation allowable as per section 32 is Rs. 1,00,000, hence, after claiming the deduction on account of depreciation of Rs. 1,00,000, there will be a loss of Rs. 16,000. This loss is on account of depreciation and, hence, loss of Rs 16,000 will be termed as unabsorbed depreciation.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business ReturnBulk Return or Revised Return Filing