a detailed presentation on provisions of set off and carry forward .

1. STUDENTS STUDY CIRCLE
SET OFF AND CARRY FORWARD OF
LOSSES
SUNIL BN
sunilbn76@gmail.com

2. Set off : it refers to adjustment of losses
against the eligible profits of the year . It is
governed by section 70 and section 71 of
the act. .

3. Set off
Inter Source Inter Head
Adjustment Adjustment
Within the same
head of income
With other heads
of income
(Section 70 ) (Section 71)

4. Section 70 : Inter source
adjustment
 Setting off loss of one source against
income from other source within the
same head .

5. Examples
• Loss of one self occupied property can
be set off against income let out
property .
• Loss from textile business can be set
off against profit of leather business

6. Taxable income from business = ( 500000 –
200000)
= 300 000

7. Rules of inter source
adjustment
rule 1) Loss from speculation business
can be only set off only against profit
of a speculation business .
Loss from
speculation business
Profit from non
speculation
business
Loss of non
speculation
business
Profit of
speculation
business

8.  That is , loss from a non speculation
business can be set off against profit
of
• Non speculation business
• Speculation business
 But for setting off loss from a
speculation business , you need to
necessarily have income from a
speculation business .

9. Rule 2 ) Loss from activity of owning
and maintaining race horses can only
be set off against income from same
business .
NOTE : ACTIVITY OF OWNING AND MAINTAINING RACE HORSES
IS NOT A SPECULATIVE BUSINESS .
That is , it can be set off against profit of a
business of owning and maintaining race
horses .

10. (Rule 3 ) NO loss can be set off
against winnings from lotteries ,
crossword puzzles etc .
.
That is casual winnings is not available
for set off against any type of loss ,
irrespective of under which head such
loss has occurred .

11. (Rule 4) long term capital loss can
only be set off against long term
capital gain .
THAT IS ,
• Long term capital loss can be set off only
against gain on sale of any other long term
capital asset .
•It cannot be set off against short term capital
gain .

12.  However , for purpose of set off of
short term capital loss , both short
term capital gains and long term
capital gains are available .
Summary :
long term capital
loss
Short term
capital gains
Short term
capital loss
Long term
capital gains
Long term
capital loss
Long term
capital gain

13. ( rule 5 ) loss from an exempt
source of income cannot be set
off against profit of a taxable
source .
Example
Loss from agriculture (exempt u/s 10 )
cannot be set off against profit of textile
business .
Long term capital loss on sale of shares in a
recognized stock exchange (exempt u/s 10(38) )
cannot be set off against long term capital gains on
sale of house .

14. Questions
Loss of let out
property
Profit of
deemed to be
let out property
Loss of
speculative
business
Profit of
leather
business
Loss from
agricultural
activities
outside india
Income
from
debenture
s

15. Section 71: Inter Head
Adjustment
 Under this section , loss which could
not be set off u/s 70 ( i.e. by way inter
source adjustment ), can be set off
against income under other heads .
 However it is also subject to certain
restrictions or rules .

16. Example

18. (Rule 1) loss from a speculation
business cannot be set off
against income of any other
head .
 It can be set off only against income
from a speculation business .

19. (Rule 2 ) loss under the head
“profits and gains of business or
profession” cannot be set off
against income from salary .
the term “ business “ in the above sentence
refers to non speculation business only , as
rule (1) already cover speculation business .

20. (Rule 3) Loss from activity of
owning and maintaining race
horses can be set off against
income from the same
business .

21. (Rule 4 ) Any loss under the
head capital gains cannot be
set off against any other head
.
Long term or short term capital loss cannot
adjusted against income of any other head .
In short , provisions of section 71 shall not be
available for losses under the head “capital
gains’’

22.  However , this doesn’t preclude
income under the head “capital gains “
for being available for adjustment
against losses under other heads .
Summary
Loss under
capital gains
Any other head
of income
Loss under
head “house
property “
Long term / short
term capital gains

23. (Rule 5) No loss can be set
off against winnings from
lotteries , cross word puzzles ,
card games etc (casual
winnings )

24. Summary of rules

25. • Long term capital gains
Long term
capital
loss
• Long term capital gains
• Short term capital gains
Short
term
capital
loss

26. • Salaries
• House property
• Business
income
• Capital gains
Income
from
other
sources

27. Questions:
Loss of non
speculation
business
Profit from activity
of owning race
horses
Loss of
speculation
business
Profit from activity
of owning race
horses
U A D Long term
capital gains

28. Carry forward of losses
 Losses which could not be set off against
income of the assessment year , do not
lapse , but are allowed to be carried
forward to be set off against income of
subsequent years .
 Carry forward of losses for each head is
governed by different sections which
define the no’s of years it can be carried
forward for, against which income it can
be set off etc

29. Section 71B: Carry forward of
loss from “House Property “
 Set off against: Future income under the
head “House Property “ only .
 Time period : maximum of 8 AY .
 the time period is to be calculated from end
of the relevant assessment year in which
loss was suffered .
 Example : if loss relates to AY 2012 -13 , it
can be c/f up to AY 2020 -21 .

30. Section 72: Carry forward of loss
of non speculation business .
 Set off against : future income from
any business of assessee .
 Time period: 8 AY
 It is not necessary that it is must be
set off against income from same
business .

31.  This c/f and set off is allowed even if the
business in which loss was suffered ,
has been discontinued .
• However , if the business if transferred ,
the set off will not be allowed to the
successor , unless such succession is by
way of inheritance .
Example : loss of car business can be
carried forward and set off against profit of
computer business .

32. IMPORTANT NOTE:
 The carried forward loss can also be
set off against a business activity ,
even though such business activity is
assessable under a different head .

33. Example :
 For example, when an assessee is
involved in letting out property on
“floor area basis’’ , it is his business ,
but the income from it , for purposes of
income tax is assessed under the
head “House property’’ .

34. Section 41(5): Set Off Of Loss
After Lapse Of 8 Years .
 In case of a business which was
discontinued , the loss of year of
discontinuance , if not set off fully ,
shall be allowed to be set off even
after the lapse of 8 years , on
satisfaction of the following conditions
.

35. Conditions :
 The business/ profession is discontinued .
 The loss of the year of discontinuance was
not fully set off previously .
 it is a non speculation business .
 After discontinuation , there is a “ Deemed
Business Receipt’’ . It includes :

36.  sect 41(1) : Subsequent recovery of
any expense , which was previously
allowed .
 sect 41(3) : Capital expenditure on
scientific research if sold without being
used for business proper .
 sect 41(4) : Recovery of bad debts
which was previously allowed .

37. Question
1) Textile business :
(a) current year loss
(b)brought forward loss of AY 2007 -08
2) Chemical business:
(a) current year loss
(b) bad debts allowed previously ,
Recovered .
(c) brought forward loss of assessment
year 2012 -13
3) Leather business : profit of current year
compute income from business .
25,000
80,000
NIL
30,000
20,000
70,000

38. Solution:
Profit of leather business
Add: Recovery of bad debts u/s 41(4) (
chemical )
Total business income of current year available
for set off .
Less; Set off of current year loss of textile
business ( u/s 70)
Less : Set off of brought forward loss of
2007- 08
TAXABLE BUSINESS INCOME FOR AY
2013-14
70,000
30,000
100,000
(25,000)
75,000
(75,000)
0

39. Section 73: Loss In Speculation
Business .
 Set off against : Income of
speculation business only .
Time Period: 4 AY
It cannot be set off against any other
head .
The business to which the loss pertains
to may be discontinued .

40. Section 73A: Loss Of Specified
Business u/s 35AD
 any loss computed in respect of a
specified business shall be allowed to
be adjusted only profit of some other
specified business.
 If any loss remains unabsorbed as
above , It can be can be carried
forward .

41. Conditions for carry forward:
 Set off against: Future income of
specified businesses only.
 Time period: it shall be allowed to
carried forward without any time limit ,
until it is fully set off .

42. Section 74: carry forward of loss
under the head “capital gains’’
 Set Off Against:
(1) Unabsorbed Short Term capital loss
- long term capital gains
- short term capital gains .
(2) Unabsorbed Long Term capital loss
- only against long term capital gains .

43. Section 74A: carry forward of
loss of activity of owning and
maintaining race horses .
 Set off against: future income of
“same’’ business only .
 time period: 4 AY .

44. Section 80 read with 139(3) :
Return Of Loss
 any assessee , who has sustained a
loss in any previous year under the
head ,
1) business or profession
2) capital gains
3) activity of owning and maintaining
race horses .

45.  And claims to carry it forward for set
off in future years , shall furnish a
“Return Of Loss’’ u/s 139(3) .
 This provision shall apply only to
above mentioned losses it self .
 Failure to submit return may render
the loss unavailable for set off in future
.

46. Section 32(2) UNABSORBED
DEPRICIATION
 Concept: depreciation can be
charged only to the extent to bring
profits to NIL .
 Hence if profit < depreciation or , there
is no profit , then (depreciation – profit
) is called as “ unabsorbed
depreciation’’ .

47. Treatment:
 Inter Source Adjustment (70) : UAD
will be first set off against profit of any
other business or profession ( if any ) .
 Inter Head Adjustment (71) : it can be
set off against income of other heads ,
except salaries and casual winnings .

48. Carry forward :
 set off against: ANY income except
salaries and casual winnings .
 Priority of set off in future years:
(1) Current year depreciation .
(2) brought forward business loss if
any
(3) Unabsorbed depreciation

49.  time period : NO time limit .
 It can be set off even the business to
which UAD pertains to has been
discontinued .

50. Problem solving technique :
1st step : look for losses which can be
set off by way of inter source
adjustment .
2nd step: Next, the losses of CY which
could not be set off completely in 1st step
must be set off .
3rd step: Now consider the carry forward
losses from LY and set them off .