Direct Taxation Mujtaba Zaidi

‘Set Off’ and ‘Carry Forward and Set Off’ of Losses

INTRODUCTION

Income tax is a tax on total income earned by a person during the previous year. There are cases where
the person earned income under various heads, or earned income from various sources under the same
head and it might also happen that the net result from the particular source/head may be a loss. This
loss can be set-off against other sources/head in a particular manner. These provisions for set-off or
carry forward and set-off of losses are contained in sections 70 to 80 of the Income Tax Act.
The set-off and carry forward of losses can be divided into two broad categories:
(1) Set-off of losses
(2) Carry forward and set-off of losses
Set-off of losses can be further sub-divided into two categories:
(i) Set-off within the same head of income.
(ii) Set-off against other heads of income.
Sequence for set-off and carry forward of losses:
1. Adjustment under the same head of income.
2. Then adjustment in the same Assessment Year from any other head.
3. If loss cannot be set-off, then carry forward loss to next Assessment Year.

Set off of loss from one source against income from another source under the same head of
income [Section 70]
Where there is a loss in respect of any source falling under any head of income, other than “Capital
gains”, the assessee shall be entitled to set off such loss against his income from any other source under
the same head.
In other words, the loss in respect of any source of income under any head of income shall be set off
against the income from any other source under the same head except capital gain loss.
Exceptions:
1) Losses from speculation business can be set-off only against the profits of speculation business.
2) Loss of specified business referred to in section 35AD cannot be set-off except against profits and gains
of any other specified business referred to in section 35AD.
3) Where there is a short term capital loss, the assessee shall be entitled to set off such loss against the
income, of any other capital asset.
4) Where there is a long term capital loss, the assessee shall be entitled to set off such loss against the
income of long term capital asset only. Long Term Capital Loss cannot be set off against short term
capital gains.
5) Losses from the activity of owning and maintaining race horses can be set-off only against the profits of
such business.

Bright Vision Academy Page | 9.1 Mujtaba Zaidi

1/48 Lalita Park Laxmi Nagar 9999666686
Direct Taxation Mujtaba Zaidi
Set off of loss from one head against income from another [Section 71]
1. Where there is a loss under any head of income, other than “Capital gains”, he shall be entitled
to set off such loss against his income, for that assessment year under any other head.
2. Where there is a loss under the head “Profits and gains of business or profession” and the
assessee has income assessable under the head “Salaries”, the assessee shall not be entitled to
set off loss of PGBP against income from Salary.
3. Where there is loss under the head “Capital gains”, the assessee shall not be entitled to set off
such loss against income under the other head.

Note 1: 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 not be entitled to set off such loss, to the extent the amount of the loss
exceeds two lakh rupees, against income under the other head.'.

[Added by F. A. 2017]

Carry forward and set off of loss from house property [Section 71B]

Where there is a loss under the head “Income from house property” and such loss cannot be set off
against income from any other head, so much of the loss as has not been so set-off shall be carried
forward to the following assessment year and –
1. Be set off against the income from house property; and
2. Shall be carried forwarded to the following assessment year, not being more than eight
assessment years immediately succeeding the assessment year for which the loss was first
computed.

Carry forward and set off of business losses [Section 72]

1. Where there is loss under the head “Profits and gains of business or profession”, not being a loss
sustained in a speculation business, and such loss cannot be set off against income under any head of
income in accordance with the provisions of section 71, then so much of the loss as has not been so
set off shall be carried forward to the following assessment year, and—
(i) it shall be set off against the profits and gains, if any, of any business or profession carried on
by him and assessable for that assessment year ;
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried
forward to the following assessment year and so on :
2. Where any deduction under section 32(2) or section 35, to be carried forward, effect shall first be
given to the provisions of this section i.e. unabsorbed depreciation shall be adjusted after adjusting
PGBP loss.
3. No loss shall be carried forward under this section for more than eight assessment years immediately
succeeding the assessment year for which the loss was first computed.

Note: - Priority of Set off

(i) Current year depreciation.
(ii) Brought forwarded Business losses.
(iii) Brought forwarded depreciation.

Bright Vision Academy Page | 9.2 Mujtaba Zaidi

1/48 Lalita Park Laxmi Nagar 9999666686
Direct Taxation Mujtaba Zaidi
Losses in Speculation Business [Section 73]

1. Any loss, in respect of a speculation business, shall not be set off except against profits and gains, of
another speculation business.
2. Where for any assessment year any loss in respect of a speculation business has not been wholly set
off under sub-section (1), so much of the loss as is not so set off shall be carried forward to the
following assessment year, and—
(i) It shall be set off against the profits and gains, if any, of any speculation business carried on by
him assessable for that assessment year ; and
(ii) If the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward
to the following assessment year and so on.
3. No loss shall be carried forward under this section for more than four assessment years immediately
succeeding the assessment year for which the loss was first computed.

Note: Transaction in respect of trading in shares on a recognised stock exchange by a Company, the
principal business of which is the business of trading in shares, shall not be treated as speculative
transaction.
[Added by Finance (No. 2) Act 2014]

Carry Forward and Set Off of Losses by Specified Business [Section 73A]

Any loss, in respect of any specified business referred to in section 35AD shall not be allowed to set off
except against profits and gains, if any, of any other specified business.
The loss not set off in the same assessment year shall be allowed to carried forward and shall be allowed
to be set off against the income of specified business only.

Losses Under the Head Capital Gains [Section 74]

1. Where there is a loss under the head “Capital gains” the loss shall be carried forward to the
following assessment year, and—
(a) if such loss relates to a short-term capital asset, it shall be set off against income, if any,
under the head “Capital gains” assessable for that assessment year in respect of any
other capital asset;
(b) if such loss relates to a long-term capital asset, it shall be set off against income, if any,
under the head “Capital gains” assessable for that assessment year in respect of any
other capital asset not being a short-term capital asset;
(c) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried
forward to the following assessment year and so on.
2. No loss shall be carried forward under this section for more than eight assessment years
immediately succeeding the assessment year for which the loss was first computed.

Bright Vision Academy Page | 9.3 Mujtaba Zaidi

1/48 Lalita Park Laxmi Nagar 9999666686
Direct Taxation Mujtaba Zaidi
Losses from certain specified sources falling under the head Income from other sources
[Section 74A]
In the case of an assessee, being the owner of horses maintained by him for running in horse races, the
amount of loss incurred by the assessee in the activity of owning and maintaining race horses in any
assessment year shall not be set off against income, from any source other than the activity of owning
and maintaining race horses in that year and shall be carried forward to the following assessment year
and—
(a) It shall be set off against the income, from the activity of owning and maintaining race horses
assessable for that assessment year :
Provided that the activity of owning and maintaining race horses is carried on by him in the previous
year relevant for that assessment year ; and
(b) If the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to
the following assessment year and so on; so,
However, that no portion of the loss shall be carried forward for more than four assessment years
immediately succeeding the assessment year for which the loss was first computed.

Common Points:
Note 1: The common principal is, for setting of the loss the assessee should be same who has incurred
such loss, except:
 if the business is carried on by one person is acquired by another through inheritance.
 Loss of amalgamating/demerged company can be set off against the income of
amalgamated/resulting company.
 Loss of the partnership firm/ proprietary concern can be set off against the income of the
company if the conditions laid down under section 47 are satisfied.
Note 2: In case of retirement or death of any partner, the firm shall not be allowed to carry forwarded
the loss proportionate to retired/deceased partner.
Note 3: The business loss can be carried forward even if the business in respect of which the loss was
computed is not carried on.
Note 4: Loss can be set off against the clubbed income also.
Note 5: As per section 80, losses except the loss under the head house property, can be carried forward
only if the loss has been determined as per a return of loss filed under section 139(3).

Accumulated losses and unabsorbed depreciation of the predecessor company allowed to be

carried forward and set off by LLP [Section 72A (6A)]
The accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed
to be the loss or allowance for depreciation of the successor limited liability partnership for the purpose
of the previous year in which business reorganization was effected and other provisions of this Act
relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. In
other words, accumulated loss shall be allowed for fresh 8 years and unabsorbed depreciation will be
allowed to be carried forward indefinitely.
However, if any of the conditions laid down in the section 47 are not complied with, the set off of loss or
allowance of depreciation made in any previous year in the hands of the successor limited liability
partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in
the year in which such conditions are not complied with.

Bright Vision Academy Page | 9.4 Mujtaba Zaidi

1/48 Lalita Park Laxmi Nagar 9999666686