UNIVERSITY INSTITUTE OF LEGAL STUDIES

PANJAB UNIVERSITY

SET OFF AND CARRY FORWARD

Submitted by: Shivansh Submitted to: Mr. Meenal Garg

Class : B.Com. LL.b(Hons.)

Section :F

Roll no. : 340/19

Semester : 10th

Session : 2023-24
 ACKNOWLEDGEMENT

The success and final outcome of my project ‘SET OFF AND CARRY FORWARD’ required
a lot of guidance and assistance from many people and I am extremely privileged to have got
this all along the completion of my project. All that I have done is only due to such supervision
and assistance and I would not forget to thank them. It would not have been possible without
the kind support and help of many individuals and organizations. I would like to extend my
sincere thanks to all of them.

I am highly indebted to ‘Mr. Meenal Garg’ for their guidance and constant supervision as
well as for providing necessary information regarding the project & also for their support in
completing the project.

I would like to express my gratitude towards my parents &friends for their kind co-operation
and encouragement which help me in completion of this project.

SHIVANSH MITTAL
Table of Contents

ACKNOWLEDGEMENT ................................................................................................................................... 2
INTRODUCTION ............................................................................................................................................. 4
INTER SOURCE ADJUSTMENT (SEC 70) ........................................................................................................... 5
GENERAL RULE: ..................................................................................................................................................5
EXCEPTIONS TO ABOVE RULE: ............................................................................................................................5
INTER HEAD ADJUSTMENT (SEC 71) ............................................................................................................... 7
GENERAL RULE: ..................................................................................................................................................7
EXCEPTION TO ABOVE RULE: ..............................................................................................................................7
CARRY FORWARD OF LOSSES......................................................................................................................... 9
1) LOSS UNDER THE HEAD ‘INCOME FROM HOUSE-PROPERTY’ (SEC. 71B). ...................................................................9
2) LOSS UNDER THE HEAD “PROFITS AND GAINS OF BUSINESS OR PROFESSION” (SEC. 72 AND 73). ....................................9
3) LOSS OF SPECIFIED BUSINESS AS REFERRED (SEC. 73A) ..........................................................................................9
4) LOSS UNDER THE HEAD ‘CAPITAL GAINS’. (SEC 74) ...............................................................................................9
5) LOSS INCURRED FROM THE ACTIVITY OF OWNING AND MAINTAINING HORSES (SEC. 74A). ...........................................9
RESTRICTIONS ........................................................................................................................................................9
SET OFF AND CARRY FORWARD OF UNABSORBED DEPRICIATION................................................................ 11
BIBLIOGRAPHY ............................................................................................................................................ 12
PRIMARY SOURCES: .........................................................................................................................................12
SECONDARY SOURCES:.....................................................................................................................................12
 INTRODUCTION

Set-off of losses, as the name suggests, can be understood as adjusting the losses incurred by a
person against his profit or income in a particular assessment year. If it so happens that it is not
possible to set-off the losses in the same assessment year, either because the assessee has not
gained required profit or because the income generated is also less than the amount is carried
forward to the next year. The process of setting off of losses and their subsequent carry-forward
maybe are covered under the following steps-

1. An inter-source adjustment under the same source of income.

2. Inter-head adjustment in the same assessment in the same year.
3. Carry-forward of a loss.

Heads of income

There are a total of five heads of income under which adjustments of the loss are made-
• Salary head
• Profit and gains from business or profession.
• Capital Gains
• House Property
• Other Sources

The income of an assessee is classified under the above-mentioned heads as provided by the
Income Tax Act1(herein after referred as act). The same heads are used for the purpose of set-
off and carry-forward as well. However, because it is not possible to have any loss under the
salary head it is not possible to use the same for any set-off or carry-forward. Further, set-off
and carry-forward under the head of other sources are not allowed. So, for the purpose of
adjusting losses, the heads of income which are used are- profit head, capital gains and house
property.

1
Income Tax Act, 1961
INTER SOURCE ADJUSTMENT (SEC 70)2

GENERAL RULE:

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

Illustration:
A has two businesses- business A and B. While the returns from business A is Rs. 5 lakh,
business B has incurred a loss of Rs. 2 lakh. In this case, the loss of Rs. 2 lakh from business
B can be set-off against income of Rs. 5 lakh from business A. It must be noted that A does not
have any option to set-off or to not set-off the loss of business B.

EXCEPTIONS TO ABOVE RULE:

1. Loss from speculation business–

The loss incurred in a speculation business can only be set-off by a profit earned in the
speculation business.

2. Loss from a specified business-

Any loss computed in respect of any specified business referred to in Section 35AD3,
shall not be set-off against profits and gains, if any, of any other specified business.

3. Long-term capital loss–

Long term capital loss can only be set-off against long term capital gain.

4. Loss from the 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.

2
Section 70 of income tax act, 1961
3
Section 35AD of income tax act, 1961
 5. Loss cannot be set-off against winning lotteries, crossword puzzles etc.-
It is by virtue of Section 58(4)4, a loss cannot be set-off against winnings from lotteries
and other forms of gambling.

6. Loss from sale of securities.

4
Section 58(4) of income tax act, 1961
 INTER HEAD ADJUSTMENT (SEC 71)5

GENERAL RULE:
Where the net result of the computation made for any year in respect of any head of income is
a loss, the same can be set-off against the income from other heads too.
Illustration:
A has two speculative businesses B and C. Besides his business, he has income from house
property. Income from business B 100000 and C (- 200000) . and income from house property
is 200000.
In this case, a business loss of Rs. 100000 can be adjusted against the property income of Rs.
2,00,000. Consequently, property income is reduced to Rs. 1,00,000.

EXCEPTION TO ABOVE RULE:

1. Loss in a speculative business- it cannot be set-off against any other income.

2. Loss in a business specified under section 35AD6- loss, computed in respect of any
specified business referred to in section 35 AD7 cannot be set off against any other
income.

3. Loss under the head capital gains– loss under this head can only be set-off by under the
head of capital gains.

4. Loss from the activity of owning and maintaining horses- cannot be set off against any
other income head.

5. Business loss cannot be set-off against salary income.

5
Section 71 of income tax act, 1961
6
Section 35AD of income tax act, 1961
7
ibid
 6. Any house property loss exceeding Rs. 2,00,000- cannot be set-off against income
under other heads of income.

7. Loss cannot be set-off against winnings from lotteries etc- by virtue of Section 58(4)8
a loss cannot be set-off against winning from lotteries.

8. Loss from the purchase of securities.

The following table tells which loss incurred under one income head can be set off under other
income heads-

LOSS SALARY HOUSE PGBP CAPITAL OTHER

INCURRED PROP. GAINS SOURCES

UNDER HOUSE (except

PROP. winning
from
lotteries)
UNDER Only under
SPECULATIVE speculative
BUSINESS business

UNDER OTHER ( except

BUSINESS AND winning
PROFESSION from
lotteries)
UNDER
CAPITAL GAIN

UNDER OTHER
SOURCES

8
Section 58(4) of income tax act, 1961
 CARRY FORWARD OF LOSSES

In cases where the loss cannot be set-off either under the same head or under any other head of
income, because of absence or inadequacy of income in the same year, then that loss is carried
forward and set off against the income of the subsequent year. However the loss so carry
forward can be set-off only against same head of income, i.e. benefit of “inter source adjustment
is lost”. According to the provisions of the Act, the following loses can be carried forward-

1) Loss under the head ‘income from house-property’ (Sec. 71B)9.

2) Loss under the head “profits and gains of business or profession” (Sec. 72 and 73)10.
3) Loss of specified business as referred (Sec. 73A)11
4) Loss under the head ‘capital gains’. (Sec 74)12
5) Loss incurred from the activity of owning and maintaining horses (Sec. 74A)13.

Restrictions

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

i. Loss can be set-off only against business income.

ii. Loss can be carried forward by the person who incurred the loss.
iii. Loss can be carried forward for 8-years.
iv. IT Return of loss should be submitted in time. (Sec 80)14 (not for carry forward of loss
under house property)
v. Continuity of business is not necessary.

9
Section 71B of income tax act, 1961
10
Section 72 and 73 of income tax act, 1961
11
Section 73A of income tax act, 1961
12
Section 74 of income tax act, 1961
13
Section 74A of income tax act, 1961
14
Section 80 of income tax act, 1961
 NATURE OF LOSS NUMBER OF YEARS TO BE SET OFF AGAINST

LOSS FROM HOUSE 8 Income from house property

PROPERTY

NON SPECULATIVE 8 Income from

BUSINESS LOSS business/profession(non
speculative)

SPECULATIVE 4 Income from speculative

BUSINESS LOSS business

LOSSES FROM 8 Income from same activity

ACTIVITY OWING AND
MAINTAINING OF
RACE HORSES

SHORT TERM CAPITAL 8 Short and long term capital gain

LOSS

LONG TERM CAPITAL 8 Long term capital loss

LOSS

LOSS OF SPECIFIED Unlimited years Income of that specified

BUSINESS U/S 35A15 business

15
Section 35A of income tax act, 1961
SET OFF AND CARRY FORWARD OF UNABSORBED
DEPRICIATION

CIT v Virmani Industries (P.) Ltd.16

The Honourable Supreme Court has set the following rules for set off and carry forward of
unabsorbed depreciation
Step 1: Where there is current year's depreciation relating to a business it should be set off
from the profits the same business.
Step 2: If full depreciation cannot be set off under Step 1 such depreciation which could not
be set off would be known as unabsorbed depreciation and such unabsorbed depreciation shall
be set off against the profits of any business or from income of profession carried on by the
assessee during the current previous year.
Step 3: If still full depreciation cannot be set off under Step 2, then it can be set off from the
incomes of any other head of income, except from the income under the head salary and casual
incomes
Step 4: If full deprecation cannot be set off under Step 3, then it shall be carried forward to
next previous year.
Step 5: Add such unabsorbed depreciation to the amount of depreciation of such previous year
in which it has been brought forward. Brought forward depreciation shall be treated as part of
current year's depreciation. Now set off aggregated depreciation as per Steps 1-3.
Step 6: Repeat Steps 1 to 5 without any time limits. This means that unabsorbed depreciation
can be carried forward for unlimited period of time.
However, Steps 5 and 6 are subject to the conditions of Section 72(1)17. This means that if there
is any brought forward loss of the business then it shall be set off in priority to such unabsorbed
depreciation.

16
CIT v Virmani Industries (P.) Ltd. [1995] 83 Taxman 343 (SC):
17
Section 72(1) of income tax act, 1961
 BIBLIOGRAPHY

PRIMARY SOURCES:

1) STATUTES
THE INCOME TAX ACT, 1961

2) CASE LAWS
CIT v Virmani Industries (P.) Ltd. [1995] 83 Taxman 343 (SC):

SECONDARY SOURCES:

1. BOOKS

Dr. Jyoti Rattan, Taxation Laws, Bharat Law House, New Delhi, 13th edn. 2021

Gaur, V.P., Rajiv Puri and Pooja Gaur, Income Tax Law, Kalyani Publishers, New Delhi, 3rd
edn. 2019

Kanga & Palkhivala, The Law and Practice of Income Tax 11th ed

2. WEBSITES

https://www.indiacode.nic.in/bitstream/123456789/2435/1/a1961-43.pdf

https://blog.ipleaders.in/concept-set-off-carry-forward-tax-laws/

https://www.scribd.com/document/158751925/Set-Off-Carry-Forward-Chart