Set Off or Carry Forward and Set Off of Losses [section 70 to 80]

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Table of Contents

1.  Section 70: Inter-Source Adjustment – Set Off of Loss from one Source against Income from another Source under the same head of Income

(1). Introduction to Section 70 –

The Indian Income Tax Act, 1961, provides various provisions for the computation of income and the determination of tax liability. One such provision is Section 70, which deals with inter-source adjustment or the set-off of losses from one source against income from another source under the same head of income.

Under the provisions of Section 70, if an assessee has incurred a loss under any source of income, such a loss can be set off against income from any other source under the same head of income. This means that if an individual has income from multiple sources such as salary, house property, business, or capital gains, the losses from one source can be adjusted against income from another source.

This provision is particularly beneficial for taxpayers who have incurred losses in a particular source of income and have income from other sources within the same head. By setting off the losses against the income, the overall tax liability can be reduced, resulting in a lower tax burden.

However, there are certain conditions that need to be fulfilled for availing the benefit of inter-source adjustment under Section 70:

  • The losses and income should be under the same head of income. For example, losses from house property can only be set off against income from another house property.
  • The losses should be incurred in the same assessment year in which the income is earned. The losses cannot be carried forward or set off against income of subsequent assessment years.
  • The losses can be set off against income from any other source under the same head. For example, if an individual has a loss from a business and income from a house property, the loss from the business can be set off against the income from the house property.
  • The losses can be set off against income from any other source under the same head, even if the income is exempt from tax. For example, if an individual has a loss from a business and exempt income from agricultural activities, the loss from the business can be set off against the exempt income.
  • If the losses cannot be fully set off in the same assessment year, the remaining losses can be carried forward to the subsequent assessment year and set off against income from the same source.
Example:

Let’s say you have two house properties: Property A generates rental income of Rs. 50,000, and Property B generates a rental loss of Rs. 30,000.

Under Section 70, you can set off the loss of Rs. 30,000 from Property B against the income of Rs. 50,000 from Property A within the “Income from House Property” head.

As a result, you will only be taxed on the net income of Rs. 20,000 (Rs. 50,000 – Rs. 30,000).

It is important to note that the set-off of losses under Section 70 is different from the carry forward and set off of losses under Section 71. While Section 70 allows for the set-off of losses from one source against income from another source under the same head, Section 71 deals with the carry forward and set off of losses from one assessment year to another.

The provisions of Section 70 play a crucial role in reducing the tax liability of taxpayers who have incurred losses in a particular source of income. By allowing the set-off of losses against income from another source under the same head, the Indian Income Tax Act, 1961, provides relief to taxpayers and ensures a fair and equitable tax system.

(2). General Rule of Section 70 –

If the net result for any assessment year, in respect of any source under any head of income,  is a loss, the assessee is entitled to have the amount of such loss set off against his income from any other source  under the same head of income for the same assessment year.

Where the net result for any assessment year in respect of any source, falling under any head of income other than “Capital Gains “, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. This may also be referred to as intra-head adjustment.

For example, if the assessee has two houses and the net income from one house is Rs.4,80,000 while from the other house there is a loss of Rs.3,00,000, the loss shall be adjusted against the income (as both fall under the same head, i.e., ‘Income from house property’) and after set off, the income under the head ‘income from house property’ shall be Rs.1,80,000.

(3). Exceptions of Section 70 –

The following are the Exceptions to be aforesaid Rule :-

However, there are certain exceptions to this rule. In the following cases loss from one source cannot be adjusted against income from another source of income although it falls under the same head:

(a)   Loss from a Speculation Business:

As per section 73, any loss, in respect of a speculation business carried on by an assessee, shall be set off only against income of another speculation business. It cannot be set off from non-speculative business income, although speculation business also falls under the head ‘profits and gains of business or profession’. However, a business loss can be set off against income from speculation business but vice versa is not possible.

What is a speculation business:

To know what is speculative business we must first know what is a speculative transaction.

According to section 43(5) “Speculative transaction” means a 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 scrips.

 (b) Loss of a Specified Business referred to in Section 35AD:

As per section 73A, any loss computed in respect of any specified business referred to in section 35AD (e.g., business of cold chain facility, business of building and operating hotel, business of warehouse for storage of agricultural produce, etc.) shall not be set off except against profit or gains, if any, of any other specified business. It cannot be set off from any other business income.

(c)   Loss from the activity of Owning and Maintaining Race Horses:

As per section 74A, the loss incurred by the assessee, in the activity of owning and maintaining race horses, shall only be set off against the income of such activity. It cannot be set off against the income from any other source.

(d)   Loss on account of Lottery, etc. cannot be set off against winnings from Lotteries, Crossword Puzzles, Card Games, etc.:

No expenditure or allowance is allowed from winnings from lotteries or crossword puzzle, etc. Similarly, no loss from any lottery, card games, races, etc. is allowed to be set off from the income of the winnings of lotteries, crossword puzzles, card games, races, etc.

(e)   Loss from a Source which is Exempt:

Loss incurred by an assessee from a source, income from which is exempt, cannot be set off against income from a taxable source.

(f)   Capital losses:

Short-term capital loss can be set off from any capital gain (long-term or short-term) but long-term capital loss can now be set off only against long-term capital gain.
Capital loss worked out by assessee with indexation can be set off against long-term capital gains computed without indexation.

(g)   Loss arising from the purchase and sale of securities not to be allowed in certain cases [Section 94(7)]:

Where—

(i)         any person buys or acquires any securities or unit within a period of three months prior to the record date; and

(ii)        such person sells or transfers such securities within a period of three months after such date or transfers such units within a period of 9 months after such record date; and

(iii)       the dividend or income on such securities or unit received or receivable by such person is exempted,

then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.

Note.—W.e.f. 1.4.2020, dividend or income on such securities or unit received or receivable is now taxable in the hands of the recipient and as such, section 94(7) is not applicable.

(h)   Bonus Stripping [Section 94(8)]:

Where:

(i)         a person buys or acquires any units within a period of three months prior to the record date; and

(ii)        such person is allotted or is entitled to additional units on the basis of such units without making any payment; and

(iii)       he sells all or any of such units while continuing to hold all or any of the additional units within a period of 9 months after such date,

then, the loss, if any, arising to him on account of such purchase and sale of units shall be ignored for the purpose of computing his income chargeable to tax.

(4). Other Points of Section 70 –

The following points should be considered —

  1. Before adjusting loss under section 71, one has to set off the loss under section 70
  2. Barring the aforesaid cases, any loss can be set off against income under other heads of income for the same year.

For instance, 

  1. loss under the head “Income from house property” can be set off against business income, capital gains, salary income or income from other sources;
  2. business loss can be set off against property income, capital gains or other income;
  3. a loss under the head “Income from other sources” [not being from the activity of owning and maintaining race horses] can be set off against salary income, property income, business income or capital gains.
  4. No order of priority is given in the Act. One should try to first set off those losses which cannot be carried forward to the next year.
  5. Barring the cases discussed in para 134.2, in all other cases a loss has to be first adjusted against available income under other heads of income. No option is available to set off a loss or not to set off a loss.

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

(1)  Introduction to Section-71 (Inter-Head Adjustment)

Under the Indian Income Tax Act, 1961, taxpayers are allowed to set off losses incurred under one head of income against income earned under another head of income. This provision is known as inter-head adjustment and is governed by Section 71 of the Income Tax Act.

Section 71 allows taxpayers to adjust losses from one head of income against income from any other head of income, subject to certain conditions and limitations. This provision helps taxpayers to minimize their tax liability by offsetting losses against income, thereby reducing their overall taxable income.

Conditions for Inter-Head Adjustment

There are certain conditions that need to be fulfilled for inter-head adjustment to be allowed:

·         The loss should be incurred in the same assessment year.

·         The loss should be a result of a business or profession carried on by the taxpayer.

·         The loss should be classified under one of the specified heads of income.

Limitations on Inter-Head Adjustment

While inter-head adjustment is allowed under Section 71, there are certain limitations to be aware of:

·         The amount of loss that can be set off against income from another head is subject to certain specified limits.

·         Losses from the head of income ‘Capital Gains’ cannot be set off against income from any other head.

·         Losses from the head of income ‘Income from Other Sources’ can only be set off against income from the same head.

Carry Forward of Unadjusted Losses:

If the losses cannot be fully set off in the current year due to insufficient income or other limitations, the unadjusted losses can typically be carried forward to future years. The carry-forward and set-off of losses are subject to certain conditions and time limits as specified by the Income Tax Act.

Example:

·         Let’s say you have a business that incurred a loss of Rs. 100,000 during the financial year. Additionally, you earned Rs. 60,000 from a rental property.

·         Under Section 71, you can set off the loss from the business (Profits and Gains of Business or Profession head) against the rental income (Income from House Property head).

·         As a result, your taxable income from the Income from House Property head will be reduced to Rs. 60,000, and the remaining loss of Rs. 40,000 can be carried forward to future years for set-off against income from the same head.

Importance of Inter-Head Adjustment

Inter-head adjustment plays a crucial role in the taxation system as it allows taxpayers to optimize their tax liability. By setting off losses against income, taxpayers can reduce their taxable income, which in turn decreases the amount of tax they are required to pay.

For example, if a taxpayer incurs a loss from a business or profession, they can set off this loss against income from salary or house property. This reduces their overall taxable income and consequently lowers their tax liability.

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

Section 71(2A) which states that loss under the head ‘Business Or Profession’ cannot be set off from income under the head ‘Salaries’.

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.

Understanding the provision

Section 71(2A) of the Indian Income Tax Act, 1961 specifies that if an individual incurs a loss under the head ‘Business Or Profession’, this loss cannot be set off against income earned under the head ‘Salaries’. This means that if you have a salaried income and also run a business or profession which incurs a loss, you cannot use this loss to reduce your taxable income from salary.

This provision was introduced to prevent individuals from misusing the losses incurred under the head ‘Business Or Profession’ to reduce their tax liability on their salaried income. The rationale behind this provision is to ensure that losses from business activities are only set off against income generated from such activities and not against income from other sources.

Illustration of the provision

Let us consider an example to understand this provision better. Mr. A is a salaried individual earning a monthly income of Rs. 50,000. He also runs a business of selling handmade products. Unfortunately, in a particular financial year, his business incurs a loss of Rs. 2,00,000.

Now, if Section 71(2A) did not exist, Mr. A could have set off this loss against his salaried income and reduce his taxable income from salary. However, due to this provision, Mr. A cannot set off the loss from his business against his salaried income. As a result, he will have to pay tax on his entire salaried income of Rs. 6,00,000 (Rs. 50,000 per month for 12 months) without any adjustment for the loss incurred in his business.

Implications for individuals

The provision of Section 71(2A) has significant implications for individuals who have both salaried income and income from a business or profession. It means that any losses incurred in the business cannot be used to offset the tax liability on the salaried income. This can result in higher tax liability for such individuals.

However, it is important to note that the loss incurred under the head ‘Business Or Profession’ can be carried forward and set off against income from the same head in future years. This provision allows individuals to carry forward the losses and reduce their tax liability in subsequent years when the business starts generating profits.

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

Under Section 71(3) of the Indian Income Tax Act, 1961, losses under the head ‘Capital Gains’ can be set off against gains under the same head. This means that if you have incurred capital losses in a particular financial year from the sale of assets such as stocks, real estate, or other capital assets, you can offset these losses against capital gains you may have earned during the same financial year.

For example, if you incurred a loss from selling stocks (short-term or long-term) during the financial year, you can offset this loss against any capital gains you made from selling other stocks or assets in the same financial year. This helps in reducing your overall taxable capital gains.

However, it’s important to understand that capital losses can typically only be set off against capital gains and not against income from other heads such as ‘Salaries’ or ‘Business or Profession.’ Additionally, there are rules regarding carry-forward of unadjusted capital losses to future years, which may be subject to certain conditions and limitations as per the Income Tax Act.

(4) 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)]:

Loss set off is an important concept in the Indian Income Tax Act, 1961 that allows taxpayers to offset their losses from one head of income against income from another head. One such provision is Section 71(3A) which specifically deals with the set off of losses under the head ‘Income from House Property’.

Under this provision, taxpayers are allowed to set off the loss incurred from house property against income from any other head up to Rs. 2,00,000. This means that if you have incurred a loss from your house property, you can adjust it against your income from salary, business, or any other source.

Let’s understand this provision in detail:

Loss Set Off under Section 71(3A)

Section 71(3A) of the Indian Income Tax Act, 1961 provides relief to taxpayers who have incurred a loss under the head ‘Income from House Property’. According to this provision, the loss can be set off against income from any other head up to a maximum of Rs. 2,00,000.

For example, if you have a loss of Rs. 1,50,000 from your house property and your income from salary is Rs. 5,00,000, you can set off the entire loss of Rs. 1,50,000 against your salary income. This will effectively reduce your taxable income to Rs. 3,50,000.

Conditions for Loss Set Off

While the provision allows taxpayers to set off their losses from house property, there are certain conditions that need to be fulfilled:

  • The loss can only be set off against income from any other head and not against income from the same head. For example, you cannot set off the loss from your house property against income from another house property.
  • The maximum amount that can be set off is Rs. 2,00,000. If your loss exceeds this limit, the remaining loss can be carried forward to subsequent years and set off against income from house property only.
  • The loss can be set off in the same year in which it is incurred or carried forward to subsequent years. However, the maximum set off allowed in any year is limited to Rs. 2,00,000.
  • The set off can be done voluntarily by the taxpayer while filing their income tax return. It is not done automatically by the income tax department.

Advantages of Loss Set Off

The provision of loss set off under Section 71(3A) provides several advantages to taxpayers:

  • Reduction in taxable income: Loss set off allows taxpayers to reduce their taxable income by adjusting the loss incurred from house property against income from other heads. This helps in lowering the overall tax liability.
  • Optimal utilization of losses: Losses from house property can be set off against income from any other head, providing flexibility to taxpayers in utilizing their losses effectively.
  • Carry forward of losses: If the entire loss cannot be set off in a particular year, the remaining loss can be carried forward to subsequent years and set off against income from house property. This helps in maximizing the benefit of losses.

Examples of Section 71(3A)

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.

  Rs.
Income under the head ‘Salaries’ 3,00,000
Income under the head ‘House Property’ 40,000
Business Loss (-) 1,90,000
Loss from a specified business referred to in Section 35AD (-) 60,000
Short-term Capital Loss (-) 60,000
Long-term Capital Gain 2,40,000

Solution :

  Rs. Rs.
Income from Salary   3,00,000
Income from House Property    
Income 40,000  
Less: Business loss adjusted (-) 10,000  
Business Loss (-) 1,90,000  
Less: Set off against capital gain 1,80,000  
Less: Set off against house property income 10,000 NIL
Loss from specified business not allowed to be set off (-) 60,000  
Income from Capital Gain    
Long-term Capital Gain 2,40,000  
Less : Short-term Capital Gain 60,000  
  1,80,000  
Less : Business Loss Adjusted 1,80,000 NIL
Gross Total Income   3,30,000
Less : Deductions   NIL
Total Income   3,30,000
Tax on Rs. 3,30,000   4,000
Less : Rebate under Section 87A (100% of tax or Rs.12,500, whichever is Less)   4,000
Tax Payable   NIL
  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’.

3.  Section 72: Carry Forward and Set Off of Business Losses

(1)  Introduction to Section-72

Section 72, which deals with the carry forward and set off of business losses. This section allows taxpayers to carry forward their business losses and set them off against future profits, reducing their taxable income.

Carry Forward of Business Losses

Under Section 72, a taxpayer can carry forward business losses for up to eight consecutive assessment years immediately following the year in which the loss was incurred. This means that if a taxpayer incurs a business loss in a particular year, they can offset that loss against their business profits for the next eight years.

However, it is important to note that the carry forward of losses is allowed only if the taxpayer continues to carry on the same business. If there is a change in the ownership or nature of the business, the losses cannot be carried forward.

Set Off of Business Losses

Section 72 also provides for the set off of business losses against other income of the taxpayer. This means that if a taxpayer has incurred a business loss but has income from other sources, they can set off the losses against that income, reducing their overall taxable income.

The set off can be done in two ways:

  • Set off against any other income in the same assessment year: A taxpayer can set off their business losses against any other income they have earned in the same assessment year. For example, if a taxpayer has a business loss of Rs. 1,00,000 and has earned Rs. 2,00,000 from other sources, they can set off the business loss against the other income and pay tax only on the remaining Rs. 1,00,000.
  • Set off against any other income in the following years: If a taxpayer is unable to set off their business losses in the same assessment year, they can carry forward the losses and set them off against any other income they earn in the following years, within the eight-year limit. This provision provides flexibility to taxpayers who may not have sufficient income in a particular year to set off their losses.

Conditions for Carry Forward and Set Off

There are certain conditions that taxpayers must meet in order to avail of the carry forward and set off of business losses under Section 72:

  • The taxpayer must file their income tax returns within the due date specified by the Income Tax Act.
  • The taxpayer must maintain proper books of accounts and get them audited if required.
  • The taxpayer must continue to carry on the same business in order to carry forward the losses.
  • The business must be the same for which the losses were incurred.
  • The taxpayer must continue to be engaged in the same business in the year in which the loss is set off.
  • The loss can only be set off against profits and gains of the same business or profession.
  • The loss can be carried forward for a maximum of eight years.
  • If the taxpayer discontinues the business, the losses can only be carried forward for four years.

Change in the Constitution of the Business:

In case there is a change in the constitution of the business, such as a merger or amalgamation, and the business continues, the accumulated losses can be carried forward and set off by the successor entity under certain conditions.

(2) Business Losses can be adjusted only against Business Income

In the context of the Income Tax Act, business losses can typically be adjusted only against business income. This principle is in line with the specific provisions of the Income Tax Act, including Section 72.

When a taxpayer incurs a business loss in a particular financial year, they are generally allowed to carry forward that loss and set it off against the profits and gains of the same business or profession in future assessment years. This means that you can use the loss from one year to reduce the taxable income from the same business or profession in subsequent years.

It’s essential to note that losses from one head of income, such as “Profits and Gains of Business or Profession,” cannot usually be set off against income from other heads, such as “Salaries” or “Capital Gains,” unless specific provisions of the Income Tax Act allow for such set-offs, as explained in my previous responses.

(3) Business in respect of which a Loss is incurred may or may not be Continued

In the context of the Income Tax Act, when a loss is incurred in a business, the continuation or discontinuation of that business is a factor that affects how the losses can be adjusted for tax purposes. Here’s how it works:

Continuation of Business:

If a taxpayer incurs a loss in a business or profession and continues to operate that same business in the subsequent financial years, they can carry forward and set off the losses against the profits and gains of the same business in those future years.

Discontinuation of Business:

If the taxpayer discontinues the business in which the loss was incurred, the treatment of the losses changes. In such cases, the losses can still be carried forward, but they can only be set off against the profits and gains of the same business if the business is re-established within a specified period, typically within four years from the year in which the loss was incurred. If the business is not re-established within this period, the losses may become ineligible for set-off.

So, whether or not the business is continued has implications for how the losses can be adjusted for tax purposes. If the business is continued, losses can be set off against future profits from the same business. If the business is discontinued, there is a time limit within which the business must be re-established for the losses to remain eligible for set-off against future business income.

(4) Losses can be Set Off only by the Assessee who has incurred Loss

Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this Chapter (relating to set off and carry forward of loss) shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income. In other words, the brought forward business losses can be set off only by the same assessee. The assessee, who has suffered the loss and in whose hands the loss has been assessed, is the person who can carry forward the loss and set off the same against his business income of the subsequent year.

The following are the exceptions:

(a) Inheritance:

Where a business carried on by one person, is acquired by another person through inheritance.

For Example:

X is carrying on a business and there are losses to the extent of Rs.5,00,000 which can be carried forward and set off against the income of the subsequent years. X dies and his son S inherits his business. The losses incurred by X can be set off by his son S against the income from a business activity carried on by S. However, such loss can be carried forward by the son for the balance number of years for which the father could have carried forward the loss. However, the unabsorbed depreciation cannot be carried forward by the legal heir as inheritance is not covered under section 32(2).

(b) Amalgamation:

Business losses and unabsorbed depreciation of an amalgamating company can be set off against the income of the amalgamated company if the amalgamation is within the meaning of section 72A/72AA of the Income-tax Act. If the amalgamation is not of the nature specified in section 72A/72AA, the business loss and unabsorbed depreciation of the amalgamating company cannot be carried forward by the amalgamated company. Similarly, business losses and unabsorbed depreciation of an amalgamating co-operative bank can be set off against the income of successor cooperative bank, i.e., the amalgamated co-operative bank, if the amalgamation is within the meaning of section 72AB.

(c) Succession of Proprietary Concern or a Firm by a Company:

Where there has been reorganization of business whereby a proprietary concern or a Firm is succeeded by a company and certain conditions mentioned in section 47(xiii) or (xiv) arc fulfilled, the accumulated business loss and the unabsorbed depreciation of the predecessor proprietary concern/firm shall be deemed to be the loss or allowance for depreciation of the successor company for the previous year in which business reorganisation was effected and carry forward provisions shall be applicable to the successor company.

(d) Succession of a Private Company or Unlisted Public Company by a Limited Liability Partnership:

Where there has been reorganization of business whereby a private company or unlisted public company is succeeded by a limited liability partnership and certain conditions mentioned in section 47(xiiib) are fulfilled, the accumulated business loss and unabsorbed depreciation of the predecessor company for the previous year shall be deemed to be loss or allowance for depreciation of the LLP for the previous year in which business reorganization was effected and carry forward provision shall be applicable to successor LLP.

(e) Demerger:

Loss of the demerged company can be carried forward by the resulting company subject to fulfilment of certain conditions which the Central Government may for this purpose notify, to ensure that the demerger is for genuine business purposes. Similarly, certain losses of the demerged co-operative bank can be carried forward by the resulting co-operative bank in certain cases.

(5) Period of Carry Forward:

Each year’s loss is a separate loss and no loss shall be carried forward for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Therefore, a loss of previous year 2021-22, i.e., assessment year 2022-23 can be carried forward till assessment year 2030-31.

Besides the above, the following can also be carried forward indefinitely although these are not business losses as per Income-tax law:

(i)         unabsorbed depreciation;

(ii)        unabsorbed capital expenditure on scientific research;

(iii)       unabsorbed expenditure on family planning.

(6) Order of Set Off:

Unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed expenditure on family planning are not parts of business losses and they can also be carried forward. However, as per section 72(2), the business loss should be set off before setting off unabsorbed depreciation. etc. Such carried forward business loss will be set off against business head only after the current year’s depreciation, current capital expenditure on scientific research and expenditure on family planning have been claimed. Therefore, the order of set off will be as under:

(i)         current year depreciation [Section 32(1)];

(ii)        current year capital expenditure on scientific research and current year expenditure on family planning to the extent allowed;

(iii)       brought forward business or profession losses [Section 72(1)];

(iv)       unabsorbed depreciation [Section 32(2)j;

(v)        unabsorbed capital expenditure on scientific research [Section 35(4)];

(vi)       unabsorbed expenditure on family planning [Section 36(1)(ix)].

(7) Return of Loss:

The return of loss must have been furnished before due date prescribed under section 139(1), otherwise the loss cannot be carried forward.

Here’s how it works:

Carrying Forward Losses:

If a taxpayer incurs losses in a particular financial year and wishes to carry forward those losses to offset against income in future years, they must file their tax return for that financial year on or before the due date specified in Section 139(1). This is typically July 31st of the assessment year.

Consequence of Missed Due Date:

If the taxpayer fails to file their tax return by the due date, they may lose the right to carry forward the losses. In such cases, the losses may not be eligible for carry forward to future years, and the taxpayer may forfeit the tax benefit associated with those losses.

4.  Special Provisions of Set Off of Losses in case of an Individual or HUF who has opted to be Taxed as per Provisions of Section 115BAC

Under the Income Tax Act, individuals and Hindu Undivided Families (HUFs) have the option to be taxed as per the provisions of Section 115BAC. This section allows them to avail certain special provisions for set off of losses, which can significantly impact their tax liability. In this blog post, we will explore the special provisions of set off of losses under Section 115BAC and the benefits they offer to individuals and HUFs.

Benefits of Section 115BAC for Individuals and HUFs

The special provisions of set off of losses under Section 115BAC offer several benefits to individuals and HUFs:

Flexibility in Set Off:

Individuals and HUFs can set off losses from one source of income against any other source of income, providing them with greater flexibility in tax planning.

Reduction in Tax Liability:

The ability to set off losses without any restrictions or limitations can significantly reduce the tax liability of individuals and HUFs.

Carry Forward of Losses:

The provision to carry forward losses for up to 8 years ensures that taxpayers do not lose out on the benefit of losses incurred in a particular year.

Special Provisions of Set Off of Losses under Section 115BAC

Section 115BAC of the Income Tax Act provides certain special provisions for set off of losses for individuals and HUFs who have opted to be taxed as per its provisions. These special provisions aim to provide relief to taxpayers by allowing them to set off losses without any restrictions or limitations.

Under Section 115BAC, individuals and HUFs can set off losses from one source of income against any other source of income, irrespective of the nature or category of income. This means that losses from business or profession can be set off against income from salary, house property, capital gains, or any other source of income.

Additionally, Section 115BAC also allows individuals and HUFs to carry forward losses for a period of up to 8 years. This means that if a taxpayer is unable to set off losses in a particular year, they can carry forward those losses and set them off against income in the subsequent years, up to a maximum of 8 years.

For the purpose of computing the total income, where an assessee being an Individual or HUF who has opted to be taxed as per the provisions of section 115BAC, the following special provision of Set Off of Loss and Unabsorbed Depreciation shall apply—

(a) (i)    no deduction on account of interest on loan taken for self-occupied residential house property shall be allowed while computing the income under the head ‘income from house property’.

(ii)        the total income shall be computed without set off of any loss under the head ‘income from house property’ with any other head of income in the same assessment year.

(b)        the total income shall be computed without set off of any loss carry forward or depreciation for any earlier assessment year, if such loss or depreciation is attributable to any of the following deductions:

(i)         Deduction available to SEZ unit under section 10AA.

(ii)        Additional depreciation under section 32(1)(iia) to an assessee engaged in the business of manufacture of any article or a thing or generation, transmission or distribution of power.

(iii)       Investment allowance of 15%  if new plant and machinery is installed in notified backward areas in certain States as per section 32AD.

(iv)       Deduction under section 33AB to an assessee engaged in the business of growing & manufacturing of Tea/Coffee/Rubber.

(v)        Deduction under section 33ABA on account of deposit in Site Restoration Fund.

(vi)       Deduction in respect of payment made to certain association/institutions for scientific research [Section 35(1)(ii)] or payment made to a company to be used for scientific research [Section 35(1)(iia)] or payment made to certain institutions for research in social sciences or statistical research [Section 35(1)(iii)] or payment made to a National Laboratory or a University or an Indian Institute of Technology [Section 35(2AA)].

(vii)      Deduction under section 35AD in respect of expenditure on specified business.

(viii)     Deduction under section 35CCC in respect of expenditure on agriculture extension project.

Loss and Depreciation referred to in Clause (b) above shall be deemed to have been given full effect to [Section 115BAC(3)]

The loss and depreciation referred to in clause (b) above shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year.

However, where there is a depreciation allowance in respect of a block of assets which has not been given full effect to prior to the assessment year beginning on 1.4.2022, corresponding adjustment shall be made to the written down value of such block of assets as on 1.4.2021 in the prescribed manner (see Notification No. 82/2020, dated 1.10.2020), if the option under section 115BAC(5) is exercised for a previous year relevant to the assessment year beginning on 1.4.2022.

Example :

Let us assume that the brought forward business loss and unabsorbed depreciation of earlier assessment years to be set off in this previous year, in case of R an individual, is Rs.3,00,000 and Rs.2,40,000 respectively. The brought forward loss includes the loss attributable to the following deductions claimed in the earlier years.

  Rs.
Investment allowance of 15% if new plant and machinery is installed in notified backward areas in certain States as per section 32AD. 75,000
Deduction in respect of payment made to certain association/institutions for scientific research [Section 35(1 )(ii)] 40,000
Deduction under section 35CCC in respect of expenditure on agriculture extension project. 35,000

Further, brought forward unabsorbed depreciation includes Rs.1,30,000 on account of additional depreciation claimed in the past. Written down value of the asset as on 1.4.2021 is Rs.6,20,000.

In this example, the business loss which is allowed to be set off shall be Rs. 50,000 (i.e., Rs.3,00,000 — Rs.75,000 — Rs.40,000 — Rs.35,000) which are attributable to deductions on account of— (i) investment allowance (ii) donation to certain association/institutions for scientific research and expenditure on agriculture extension project.

Further, unabsorbed depreciation of Rs.2,40,000 — Rs.1,30,000 (on account of unabsorbed additional depreciation) = Rs.1,10,000 shall be allowed to be carried forward for set off and Rs.1,30,000 on account of unabsorbed additional depreciation shall be added to the written down value of the asset as on 1.4.2021.

Hence, the written down value of the asset for the purpose of claiming depreciation shall be Rs.6,20,000 + Rs.1,30,000 = Rs.7,50,000.

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