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Set Off and Carry Forward of Losses

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Set Off and Carry Forward of Losses

Set Off and Carry Forward of Losses

As per the Income tax act ,Set off of losses means adjusting the losses against the profit or income of that particular year. 

Losses that are not set off against income in the same year, ie.in excess can be carried forward to the subsequent years for set off against income of those years. 

A set-off could be an intra-head set-off or an inter-head set-off. 

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, e.g. Adjustment of loss from business A against profit from business B.

Conditions to be kept in mind while making intra-head adjustment of loss

Following restrictions are to be noted  before making intra-head adjustment of loss: 

1) Loss from speculative business cannot be set off against any income other than income from speculative business.

 However, non-speculative business loss can be set off against income from speculative business.

 2) Long-term capital loss cannot be set off against any income other than income from long-term capital gain. 

However, short-term capital loss can be set off against long-term or short-term capital gain.

 3) No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature. 

4) 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.

 5) Loss from business specified under section 35AD cannot be set off against any other income except income from specified business 

section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building a housing projects, etc.

Inter-head adjustment 

After making intra-head adjustment , the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head against income from other head, E.g., Loss under the head of house property to be adjusted against salary income. 

Conditions to be kept in mind while making inter-head adjustment of loss

Following restrictions should be noted before making inter-head adjustment: 

1) Before making inter-head adjustment, the taxpayer has to first make intra-head adjustment. 

2) Loss from speculative business cannot be set off against any other income. However, non-speculative business loss can be set off against income from speculative business. 

3) Loss under head “Capital gains” cannot be set off against income under other heads of income. 

4) No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature. 

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

6) Loss from business specified under section 35AD cannot be set off against any other income 

 7) Loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries”. 

8) With effect from the assessment year 2018-19, loss under the head “house property” shall be allowed to be set-off against any other head of income only to the extent of Rs. 2,00,000 for any assessment year. 

9) However, unabsorbed loss shall be allowed to be carried forward for set-off in subsequent years as per the existing provisions of section 71B. 

Carry forward of unadjusted loss

Many times still the loss remains unadjusted after making inter or intra head adjustments.

 Such unadjusted loss can be carried forward to next year for adjustment against subsequent year(s)’ income. 

Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income. 

Provisions under the Income -tax law in relation to carry forward and set off of business loss other than loss from speculative business 

If loss of any business/profession (other than speculative business) cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustment in the next year. In the subsequent year(s) such loss can be adjusted only against income charged to tax under the head “Profits and gains of business or profession”

Loss under the head “Profits and gains of business or profession” can be carried forward only if the income tax return of the year in which loss is incurred is furnished on or before the due date of furnishing the return

Such loss can be carried forward for 8 years immediately succeeding the year in which the loss is incurred.

 Above provisions are not applicable in case of unabsorbed depreciation 

Loss from business specified under section 35AD

Loss from business specified under section 35AD cannot be set off against any other income except income from specified business Such loss can be carried forward for adjustment against income from specified business for any number of years. 

Loss from business specified under section 35AD can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return as prescribed under section 139(1).

Loss from the business of 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. Such loss can be carried forward only for a period of 4 years.

Loss of any speculative business 

If loss of any speculative business cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustment in the next year.

 In the subsequent year(s) such loss can be adjusted only against income from speculative business (may be same or any other speculative business). 

Loss from speculative business can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1). 

Such loss can be carried forward for 4 years immediately succeeding the year in which the loss is incurred. 

Above provisions are not applicable in case of unabsorbed depreciation of speculative business 

Provisions under the Income -tax Law in relation to carry forward and set off of house property loss 

If loss under the head “Income from house property” cannot be fully adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward to next year. 

In the subsequent years(s) such loss can be adjusted only against income chargeable to tax under the head “Income from house property”. 

Such loss can be carried forward for 8 years immediately succeeding the year in which the loss is incurred.

Loss under the head “Income from house property” can be carried forward even if the return of income/loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as prescribed under section 139(1). 

Provisions under the Income -tax law in relation to carry forward and set off of capital loss

 If loss under the head “Capital gains” incurred during a year cannot be adjusted in the same year, then unadjusted capital loss can be carried forward to next year. 

In the subsequent year(s), such loss can be adjusted only against income chargeable to tax under the head “Capital gains”, however, long-term capital loss can be adjusted only against long-term capital gains.

 Short-term capital loss can be adjusted against long-term capital gains as well as short-term capital gains. 

Such loss can be carried forward for 8 years immediately succeeding the year in which the loss is incurred. Such loss can be can carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1).

 

Provisions under the Income -tax Law relating to set off of unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed capital expenditure on promoting family planning amongst the employees :

Depreciation is first deducted from the income chargeable to tax under the head “Profits and gains of business or profession”.

 If such depreciation could not be fully adjusted against such income chargeable to tax in that previous year, the unabsorbed portion shall be added to the amount of depreciation for the following year and shall be deemed to be the part of depreciation for that year

Similar treatment would be given to other allowances as mentioned above

Order of priority 

However, in the case of set off, following order of priority is to be followed: 

1) First adjustments are to be made for current scientific research expenditure, family planning expenditure and current depreciation.

 2) Second adjustment is to be made for brought forward business loss.

 3) Third adjustments are to be made for unabsorbed depreciation, unabsorbed capital expenditure on scientific research or on family planning.

 Carry forward of loss in case of change in the constitution of business Generally, the person incurring the loss is only entitled to carry forward the loss to be adjusted in subsequent year(s). However, in certain cases of reconstitution of the business like amalgamation, demerger, conversion of proprietary firm into company or conversion of partnership firm into company, etc., the reconstituted entity is entitled to carry forward the unadjusted loss of predecessor entity but certain conditions are to be satisfied. 

Provisions relating to carry forward of loss in case of retirement of a partner from a partnership firm 

Section 78 contains provisions relating to carry forward and set off of loss in case of change in constitution of a partnership firm due to death or retirement of a partner

In such a case, the share of loss attributable to the outgoing partner cannot be carried forward by the firm. 

Restriction of section 78 is applicable only in case of loss and is not applicable in case of adjustment of unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning expenditure. 

Special provisions relating to carry forward and set-off of losses in case of change in shareholding of certain companies 

Section 79 of the Income-tax Act, 1961 provides for carry forward and set-off of losses where a change in shareholding has taken place in a previous year in case of following companies:- 

As amended by Finance A c t, 2 021

1) In case of a company, being a company in which the public are not substantially interested but not being an eligible start-up as referred to in section 80-IAC, no loss incurred in any year prior to the previous year in which change in shareholding has taken place shall be carried forward and set off against the income of the previous] year, unless on the last day of the previous year, the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred 

2) In case of a company, being a company in which the public are not substantially interested and an eligible start-up as referred to in section 80-IAC, the loss incurred in any year prior to the previous year in which change in shareholding has taken place, shall be allowed to be carried forward and set off only if all the shareholders of the company who held shares carrying voting power on the last day of the previous year in which the loss was incurred, continue to hold shares on the last of the current year. 

Further, the loss should have been incurred during the period of 7 years beginning from the year in which the company is incorporated. 

However, to facilitate ease of doing business in case of an eligible start-up, the Finance (no.2) Act, 2019 has amended section 79 to provide that loss incurred, by the closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions specified above, i.e., continuity of 51% shareholding or continuity of 100% of original shareholders. [w.e.f. Assessment Year 2020-21] 

However, the provisions of section 79 shall not apply in following cases. 

In other words, there shall be no restriction on carry forward and set-off of losses if

  1. a) the change in shareholding takes place consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift; or 
  2. b) the assessee is a subsidiary of a foreign company and the foreign holding company is amalgamated or merged with another foreign company subject to condition that 51% shareholders of the amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company. 
  3. c) the change in shareholding take place in the previous year pursuant to approved resolution plan under the Insolvency and Bankruptcy Code, 2016 after affording a reasonable opportunity of being heard to the jurisdictional Principal CIT or CIT. 
  4. d) A company, and its subsidiary and the subsidiary of such subsidiary, where: 

i.National Company Law Tribunal (NCLT), on a petition moved by the Central Govt., has suspended the board of directors of such company and has appointed new directors.

  1. Change in shareholding has taken place in a previous year pursuant to a resolution plan approved by the NCLT. 

Change in the shareholding has taken place during the previous year on account of relocation referred to in the Explanation to clauses (viiac) and (viiad) of section 47.

 

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