This article covers the provisions of The Income Tax Act, 1961 and rules made there under in regard to the Carry Forward and Set Off of Losses. The Income Tax Act has prescribed rules to set-off loss arising from one head against other heads of income. The process of setting off of losses and their carry forward can be divided in the following steps:
If in any year, the assessee 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. This may also be referred as Intra Head Adjustment.
As explained above, any loss from one source of income is firstly set off against any gain from another source within the same head. Any remaining loss can then be set off against Income from any other Head. The process is to be done in the same previous year. This is known as Inter-Head Adjustment. Eg: Loss under the head house property to be adjusted against salary income.
Exceptions:
If the losses could not be set off under the same head or under different heads of income in the same assessment year, such losses are allowed to be carried forward to be claimed as set off from the income of the subsequent assessment years.
| Nature of losses | Set off against which income | Max. period loss can be carried forward | Mandatory Filing of Return of Income u/s 139(1) |
| Loss from House Property | Income from House Property* | 8 Years | No |
| Loss from normal business under the head Profits and Gains from business or profession | Profit from any normal business | 8 Years | Yes |
| Loss from Speculation Business | Profit from any speculation business | 4 Years | Yes |
| Loss from Specified Business u/s 35AD | Profit from Specified Business | No Limit | Yes |
| Short Term Capital Loss | Both Short Term and Long Term Capital Gain | 8 Years | Yes |
| Long Term Capital Loss | Only Long Term Capital Gain | 8 Years | Yes |
| Loss from activity of owning and maintaining race horses | Income from activity of owning and maintaining race horses | 4 Years | Yes |
*In case in any Assessment Year, the assessee has house property loss, then he is entitled to set off such loss against income under other head upto a limit of Rs. 2 lakh per annum. The balance, if any, shall be carried forward.
Besides the above, the following can also be carried forward indefinitely although these are not business losses as per Income-tax act:
1. unabsorbed depreciation;
2. unabsorbed capital expenditure incurred on scientific research;
3. unabsorbed expenditure on family planning.
Some other provisions related to carry forward and set off of losses as provided by the Income Tax Act:
On the last day of the previous year the shares of the company carrying not less than 51 per cent of the voting power were beneficially held by person who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.(Not applicable in respect of unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning expenditure)
If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax.
As we are aware, there are numerous type of losses which are required to be set-off. Hence, the effect of depreciation, business losses and investment allowance should be given in the following order:
1. current year depreciation [Section 32(1)];
2. current year capital expenditure on scientific research and current year expenditure on family planning to the extent allowed;
3. brought forward business or profession losses [Section 72(1)];
4. unabsorbed depreciation [Section 32(2)];
5. unabsorbed capital expenditure on scientific research [Section 35(4)];
6. unabsorbed expenditure on family planning [Section 36(1)(ix)].
According to the provisions of the Act, the losses can be carried forward and set off only by the Assessee who has incurred Loss. However, there are certain exceptions to it:
As we have seen different provisions relating to set off and carry forward of losses, we can say that loss should firstly be set off within the respective head in the same AY and if still there is a loss then only inter head set off is allowed. After completing first two steps, if any loss remains then it will be carry forward and will set off in next AY under the same head of income and not different head. But there still exception to it. Therefore, we should have a clear understanding of the provisions of the act while dealing with the business losses.
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