Section 71: Inter-Head Adjustment – Set Off of Losses from one Head against income from another Head

As per section 71(1), where in respect of any assessment year, if after setting off losses against income under the same head, the net result of the computation under any head of income, other than “Capital gains” is a loss, the assessee shall be entitled to have the amount of such a loss set off against his income, if any, assessable for that assessment year under any other head. For instance, loss from business can be set off from income under the head ‘house property’ and loss under the head ‘income from other sources’ may be set off against profits of business, etc.

Further, as per section 71(2), where in respect of any assessment year, the net result of the computation under any head of income, other than “Capital gains”, is a loss and the assessee has income assessable under the head “Capital gains”, such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head “Capital gains” (whether relating to short-term capital assets or any other capital assets).

However, As per Section 71, Inter-head Adjustment towards Set of Losses under the head ‘House Property, ‘Capital gains’ and ‘Business or Profession’ shall be treated as under:

(1)      Loss under the head ‘Business Or Profession’ cannot be set off from income under the head ‘Salaries’ [Section 71(2A)]:

Where in respect of any assessment year, the net result of the computation under the head “profits and gains of business or profession” is a loss and the assessee has income assessable under the head “Salaries”, the assessee shall not be entitled to have such loss set off against such income. However, it shall be allowed to set off from income under any other head.

(2)      Loss under the head ‘Capital Gains’ [Section 71(3)]:

Such capital loss, whether short-term or long-term, shall not be allowed to be set off against income under any other head. It shall however be allowed to be carried forward.

(3)      Loss under the head ‘Income from House Property’ allowed to be set off from any other head upto Rs. 2,00,000 [Section 71(3A)]:

Notwithstanding anything contained in section 71(1) or section 71(2), where in respect of any assessment year, the net result of the computation under the head “Income from house property” is a loss and the assessee has income assessable under any other head of income, the assessee shall be entitled to set off such loss, to the maximum extent of Rs.2,00,000, against income under the other head. The balance loss of income from house property in excess of Rs.2,00,000 shall be carried forward to be set-off only under the head ‘income from house property’.

Example
Suppose, in the previous year 2021-22, income from property A is Rs.1,40,000 and from property B there is a loss of Rs.4,80,000. Besides this, there is an income under the head ‘salary’ amounting to Rs.6,00,000.

In this case, loss of Rs.4,80,000 of property B will first be set off from income from property A to the extent of Rs.1,40,000 as per section 70. The net loss of Rs.3,40,000 under the head ‘income from house property’ will be allowed to be set off from income under the head ‘salary’ to the extent of Rs.2,00,000 as per section 71(3A) and the balance of Rs.1,40,000 shall be carried forward to claim it as set off from income under the head ‘house property’ of the subsequent assessment year.

Note.—           If an individual or HUF opts to be taxed under section 115BAC, the loss under the head ‘income from house property’ shall not be allowed to be set off from any other head of income. However, it will be allowed to be carried forward to claim it as set off from income under the head ‘house property’ in the subsequent assessment years as per section 71B.

As already discussed, in the following cases as intra-head adjustment was not permitted, hence, inter-head adjustment will also not be permitted:

(a)        Loss from a speculation business;

(b)        loss from a specified business referred to in section 35AD;

(c)        Loss from the activity of owning and maintaining race horses;

(d)        Loss of lottery, etc., cannot be set off against winnings from lotteries, crossword puzzles, card games, etc.;

(e)        Loss from a source which is exempt.

Example:

From the following information submitted to you, compute the total income of A for the assessment year 2022-23 and calculate his tax liability assuming he is not allowed any deduction under sections 80C to 80U and he does not opt to be taxed under section 115BAC.

Solution :

1.         Business loss should first be set off from long-term capital gain as the long-term capital gain is taxable @ 20% whereas the income from house property, in this case, is taxable @ 5%.
2.         It may be noted that business loss cannot be set off against income under the head ‘salary’.