SET OFF AND CARRY FORWARD OF LOSSES

• Set-off of losses means adjusting the losses incurred by a person against his profit or income in a particular assessment year.

DEFINITION OF SET OFF LOSSES

• The adjustment of losses against income or profit in a particular year is called set off. Losses not set off against income can be carried forward to subsequent years and used against income. You can set off against income in either an intra-head or inter-head way.
• An intra-head adjustment under the same source of income.
• Inter-head adjustment in the same assessment in the same year. (This is applied only if a loss cannot be set-off under step-1)
• Carry-forward of a loss. (This is applicable only when 1 and 2 are not)

INCOME UNDER THE INCOME TAX ACT IS TAXABLE UNDER FIVE HEADS:

• Income from salaries
• Income from house property
• Income from business or profession
• Income from capital gains
• Income from other sources

INTRA-HEAD ADJUSTMENT

• If in any year the taxpayer has incurred loss from any source under a particular head of income, then he is allowed to adjust such loss against income from any other source falling under the same head.
• The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called intra-head adjustment.
• Loss from speculation business - The loss incurred in a speculation business can only be set-off by a profit earned in the speculation business.
• Long term capital loss - Long term capital loss can only be set-off against long term capital gain.
• Loss from specified business - Any loss computed in respect of any specified business referred to in Section. 35AD, shall not be set-off against profits and gains, if any, of any other specified business..
• Loss from activity of owning and maintaining race horses - A loss incurred in the business of owning and maintaining race horses cannot be set-off against, if any, from any other source except income from such business.No loss can be set off against gains from winning from lotteries, crosswords, puzzles, card games or other gambling.

• As explained above, any loss from one source of income is firstly set off against any gain from another source within the same head
• Any remaining loss can then be set off against Income from any other Head. This is known as Inter-Head adjustment
• Loss in a speculative business - it cannot be set-off against any other income.
• Loss in a business specified under section 35AD loss, computed in respect of any specified business referred to in section 35 AD cannot be set off against any other income.
• Loss under the head capital gains loss under this head can only be set-off by under the head of capital gains.
• Loss from activity of owning and maintaining race horses - cannot be set off against any other income head.
• Loss cannot be set-off against winning lotteries, crossword puzzles etc by virtue of Section 58(4) a loss cannot be set-off against winning from lotteries.

CARRY-FORWARD OF LOSSES

• Unadjusted loss can still occur after making the necessary and permissible inter-head and intra-head adjustments
• These unadjusted loss can be carried forward into future years to adjust for income. Different income sources have different rules regarding carry forward
• Loss under the head income from house-property (Sec. 71B).
• Loss under the head profits and gains of business or profession (Sec. 72 and 73).
• Loss under the head capital gains

The right of carry-forward and set off of loss arising in a business is subject to the following restrictions-

• Loss can be set-off only against business income.
• Loss can be carried forward by the person who incurred the loss
• Loss can be carried forward for 8 years
• Return of loss should be submitted in time.
• Continuity of business is not necessary