All about Set off and carry forward of losses and their Exceptions


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Set off and carry forward of loss

Carry forward of loss other than speculation loss – Carry forward of loss is permitted only when return is filed in time. In case of closely held company, unabsorbed loss can be carried forward only if at least 51% of shares are held beneficially by same persons who were holding them in previous year.

Unabsorbed depreciation - Unabsorbed depreciation can be set ff against any head of income other than salary. It can be carried forward to any number of years. It can be carried forward by same assessee except in case of amalgamation, demerger and business reorganization.

Speculative lossLoss from speculative transactions involves sale and purchase of commodities including stocks and shares. It can be set off against speculative profits only and can be carried forward for four years.

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Any loss can be set off against any income from that source. e.g.,

@ Loss from House Property can be set off against income from any other house property.

@ Loss from a Non speculation business can be set off against income from speculation or non speculation business.

@ Short term capital gain can be set off against any capital gains whether long term or short term.

@ Income from other sources (except loss from activity of owning & maintaining race horses can be set off against any income other than winnings from lotteries etc.

Exception

@ Losses cannot be set off against an income specifically exempted from tax u/s 10.

@ Loss in a Speculation business cannot be set-off against any Income other than a Speculative Income.

@ Long term capital loss can be set off against long term capital gains only.

@ Loss incurred from the activity of owning & maintaining race horses can be set off only against income from such business & not against any other income.

@ Business losses cannot be set-off against Salary Income

@ A loss under any head of income cannot be set off against winnings from lotteries, crossword puzzles, races (including horse races), card games or any other games of any sort or from gambling or betting of any form or nature.

Example

MrAejaz has the two business A and B.The income from Business are, from A profit Rs 250,000 and from business B Net loss of Rs. 75,000

Net Income chargeable under Profits & gains from Business & Profession will be Rs. 175,000/- (250,000 – 75,000)

CARRY FORWARD OF LOSSES & IT’S SET OFF

If a loss cannot be setoff either under the same head or under the different heads because of in sufficient income of the same year it may be carry forward and can be setoff against the income of the subsequent year . As per the income tax act the following losses can be carried forward:

1. Carry forward of Loss under Income from House Property [Sec. 71B]

Such loss can be carried forward up to 8 assessment years.Loss under Income from House Property in future can be set off only against Income from House property.

2. Carry forward of Loss & Set off of Business loss other than Speculation Loss [Sec. 72]

@ It is not necessary that the business will Continue for claiming set off of carried forward losses.

@ Losses can be set off only against Income taxed in future years under the head ‘Profits & Gains from Business & Profession’

@ Loss can be carried forward up to eight assessment years

@ Losses incurred by an assessee can be claimed for set off against future year’s income only by the assessee who has incurred such loss, subject to the below exceptions:

Inheritance of the loss making business by the assessee’s legal heir, wherein latter will be allowed to set off the losses.

In case of Amalgamation of a Company, the amalgamated money has the right to get its income set off against the carried forward losses of the amalgamating company.

In case of Demerger of company, resulting company has the right to get its income set off against the carried forward losses of the Company before demerger, subject to conditions specified by the Central Govt.

In case of succession of Proprietary concern/ Firm by a company such company has the right to get its income set off against the carried forward losses of the proprietary concern/ firm.

@ Return of Loss must be submitted in timeotherwise the loss will not be allowed to be carried forward to future years.

@ Current year depreciation, Unabsorbed Depreciation of previous years & Brought forward business losses of previous years to be set off against current year’s Business Income, the following order of priority should be followed:

First of all set off current year’s depreciation;

Secondly set off Brought forward business losses as they can be carried forward only up to 8 assessment years.

And finally set off Unabsorbed Depreciation as they can be carried forward to future years without any time limitation.

3. Carry forward and Set off of Speculation Loss [Sec. 73]

@ Losses arising from Speculative business can be set off only against Speculative Income.

@ Such losses can be carried forward only up to 4 assessment years.

@ Continuity of Business is not necessary for claiming set off of carried forward losses.

@ Return of Loss should be submitted in time otherwise the loss will not be allowed to be carried forward to future years.

4. Carry forward and Set off of Capital Loss:

@ Long Term capital loss which is carried forward to future years can be set off only against Long term capital gains, while Short term capital loss can be set off both against Short term as well as Long term capital gains.

@ Loss can be carried forward up to 8 assessment years.

@ Return of Loss should be submitted in time otherwise the loss will not be allowed to be carried forward to future years.

5. Carry forward and Set off of loss from the Activity of owning & maintaining race horses [Sec. 74A]

@ Loss can be carried forward only if the activity of owning & maintaining race horses is carried on by the assessee in the previous year in which the brought forward loss is sought to be set off.

@ Such loss can be set off only against income from owning & maintaining of race horses.

@Such loss can be carried forward up to FOUR assessment years.

@ Return of Loss should be submitted in time otherwise the loss will not be allowed to be carried forward to future years.

@ The aforesaid provisions are applicable only in case of loss from the activity of owning & maintaining Race Horses & not any other racing animals.

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