Thursday, 2 January 2020

Unit 4: Set-off and Carry Forward of Losses

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Unit 4: Set-off and Carry Forward of Losses


When income from a particular head and a loss from another head or same head is adjusted, it is called ‘set off of loss against income’.

A loss when not set off due to legal bar or due to insufficiency of income from other eligible source or head, it may be carried forward to a subsequent year for set off against income of that year.


Under Section 70, the losses incurred by the assessee in respect of one source shall be set-off against income from any other source under the same head of income, since the income under each head is to be computed by grouping together the net result of the activities of all the sources covered by that head.


In Inter head adjustment (Section 71) the loss under one head of income can be adjusted or set off against income under another head.


A very important rule to remember is that losses that are carried forward have to be set off against income from the same head in the subsequent years – they cannot be set off against income from any other head of income.

A carried forward loss can be set off against income in subsequent years only if the loss has been declared in the income tax return fi led by you.


A loss for a particular year can be carried forward only if the income tax return for that year is fi led by the due date.

The only exception to this rule is loss from house property – this loss can be carried forward even if the IT return is not fi led in time.


Loss from a source of income which is exempt from income tax (for example, an agricultural loss) cannot be set off against income from a taxable source of income.

Loss from none of the heads of income can be set off against winnings from lotteries, horse races, gambling, etc.

The losses from these cannot be set off even against income from lotteries, horse races, gambling, etc.


In any assessment year, if there is a loss under the head ‘Income from house property’, such loss will fi rst be set-off against income from any other head during the same year.

If such loss cannot be so set-off, wholly or partly, the unabsorbed loss will be carried forward to the following assessment year to be set-off against income under the head ‘Income from house property’.

The loss under this head is allowed to be carried forward up to 8 assessment years immediately succeeding the assessment year in which the loss was first computed.


A business loss can be carried forward for a maximum period of 8 assessment years immediately succeeding the assessment year in which the loss was incurred.


As per section 80, the assessee must have fi led a return of loss under section 139(3) in order to carry forward and set off a loss.

In other words, the non-fi ling of a return of loss disentitles the assessee from carrying forward the loss sustained by him.

Such a return should be fi led within the time allowed under section 139(1).

However, this condition does not apply to a loss from house property carried forward under section 71B and unabsorbed depreciation carried forward under section 32(2).

Section 72A deals with carry forward and set-off of accumulated business losses and unabsorbed depreciation in certain cases of amalgamation or demerger.

It provides that the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or depreciation, as the case may be, of the amalgamated company for the previous year in which the amalgamation took place.

Other provisions of the Act relating to set off and carry forward shall also apply accordingly.


Where there has been a demerger of an undertaking, the accumulated loss and the unabsorbed depreciation directly relatable to the undertaking transferred by the demerged company to the resulting company shall be allowed to be carried forward and set off in the hands of the resulting company.


Section 72 provides for carry forward and set off of accumulated loss and unabsorbed depreciation allowance of a banking company against the profits of a banking institution under a scheme of amalgamation sanctioned by the Central Government.


The Section 73 and Section 73A of the Income Tax Act, 1961, deals with the treatment of setoff and carry forward of losses in Speculation Business and Carry forward & set off of losses by specified businesses respectively.


Capital losses are classified as long-term or short-term.

If you hold the asset for more than one year before you dispose of it, your capital loss is long-term.

If you hold it one year or less, your capital loss is short-term.

To determine how long you held the asset, count from the date after the day you acquired the asset up to and including the day you disposed of the asset.


According to provisions of section 74A(3), the losses incurred by an assessee from the activity of owning and maintaining race horses cannot be set-off against the income from any other source other than the activity of owning and maintaining race horses.


Where there is a change in the constitution of a firm, so much of the loss proportionate to the share of a retired or deceased partner remaining unabsorbed, shall not be allowed to be carried forward by the fi rm.

However, unabsorbed depreciation can be carried forward.

Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, such other person shall not be allowed to carry forward and set off against his income, any loss incurred by the predecessor.

Amalgamation: It is an agreement (deal) between two or more companies to consolidate their business activities by establishing a new company having a separate legal existence.

Carry forward of losses: The losses which cannot be set-off in the same year are carried to the next year to set-off against income of next year.

Demerger: It is a form of corporate restructuring in which the entity’s business operations are segregated into one or more components.

Inter head adjustment: Where in respect of any assessment year the net result of the computation under any head of income is a loss.

He shall be entitled to have the amount of such loss set-off against his income, if any, under any other head of income.

Inter source Adjustment: When there is more than one source of income under the same head, the loss from one or more sources is allowed to be set-off against income from the other source under the same head.

Restructuring: It is the corporate management term for the act of reorganising the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organised for its present needs.

Set-off losses: Setting off losses against the income of the same year.

Unabsorbed depreciation: A company depreciates long-term assets to recover expenses it incurs in operating activities and maintenance processes.

Fiscal laws allow a firm to recover unabsorbed depreciation over a number of years.


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