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Set-Off & Carry Forward - A Complete Summary

Nitesh bind 
on 01 December 2018

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Do you have Losses? Have you also faced the losses in past years as well? It's sad to know that you have to confront the losses.! But do you know that there are some uses of these losses too? And these losses can somehow be used to make you benefitted. Enough of Quizzes.! Right? But I am not kidding. That's a fact that your losses are not just dead straight away. They can be utilized somewhere and this is the concept which we are gonna discuss today.

This concept is called the Set-Off & Carry Forward of Losses. Through this, we could use our Losses to adjust against our income. And in this way, our losses provide us the tax benefit. So, Let's understand it verycomfortablyand in a bit details:

1.What is Set-Off & Carry forward of Losses?

People earned incomeunder various 'heads'and alsofrom various 'sources' under the same head. So, It might also be possible that they could be having Lossesunder any particular Source/Head. This Loss of One Sources/Head can be adjusted against Income of other Source/Heads.This is called Set- Off of Losses.

Further, When Losses of any year is more than the Income of that year then the remaining Loss can be taken over to the next years and then set off. That is what called Carry Forward of Losses.

[Note: Sometimes people get confused about these two terms as in many places we could see these two words together i.e. Carry forward and Set off of Loss. Therefore, I would like to make a clear distinction in these two;

* Set-Off = When only "Set-Off" word is used.Then it means to Adjust the Losses of the current year with the profit of current year.

* Carry Forward = It always means "Carry Forward and Set-Off" of loss which is taking the excess losses ofthe current year to the next years and then adjust with the profit of those coming years.]

2.What is the manner of Set-Off?

As we discussed above, income/losses may be coming from different Heads or even different sources under the same head and therefore the manner in which losses can be Set Off would also be on these two bases:

(i) Intra-Head Set Off [i.e. adjust within same head]
(ii) Inter-Head Set Off [i.e. adjust with other heads]

*Intra-Head Set-Off Procedure:

The Losses from one source can be set off against the income from another sourcebut under the same head. It can also be called as Inter-source.

For example- Loss from Business A can be set off against the profit from Business B. Here, Business A is one source and Business B is another source but both are under the same head i.e PGBP.

EXCEPTIONS:

There are some exceptions to this normal Inter-Head Set-Off. There are some Losses which can be not be set off against any other source. These are as follows:

- Losses from Speculation Business;
- Losses from the Activity of Owning and Maintaining Race-Horses;
- Long-Term Cap.can't be set off against Short Term Capital Gains; Loss
- 35AD business loss[can only be set off against 35AD Business income].

[Important Note:- If there are Losses under any of above 4 exception case, that can not be set off against any other source/head except their own income.

BUT IF THERE IS INCOME UNDER THESE 4 (EXCEPTION) SOURCES, THEN LOSSES OF OTHER SOURCES/HEADS CAN BE SET-OFF AGAINST SUCH INCOME.]

*Inter-Head Set-Off Procedure:

After making the intra-head adjustment (if any) the next step is to make an inter-head adjustment. If in any year, the taxpayer has incurred a loss under one head and has income under other head, then he can adjust the loss from one head against income from other head, E.g., Loss under the head of house property to be adjusted against salary income.

EXCEPTIONS:

- All 4 exceptions as mentioned under Intra-Head set off. &
- PGBP Income cannot be set off against Salary Income.

Note: 1 -If there is a Loss under House Property Head, then such loss can be set off against other heads but ONLY TO THE EXTENT OF RS. 2,00,000. Rest of the Loss can be carried forward to the next years. But in next years such loss SHALL BE SET OFFONLYAGAINST HOUSE PROPERTY INCOME. (FA, 2017)

Note: 2- Sequence of Set off & Carry Forward and Set off would be as follows:

  • Step-1: First Set off among different sources (Intra-Head Adjustments);
  • Step-2: Then Balance Loss, Set off with Other Heads of Income (Inter-Head Adjustments);
  • Step-3: Still has the Loss, Carry forward and Set Off with the next year's Incomes.

3. What is the manner of Carryforward (C/F)?

Many times it may happen that after making intra-head and inter-head adjustments, still there could be some loss remains unadjusted. Such unadjusted loss can be carried forward to next year for adjustment and adjust in next years. Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income which are as follows:

(i) C/F and Set off of Loss under House Property Head:

Max. Allowed Period: Up to Next 8 A.Y.(excluding the A.Y. to which the loss pertains)

Possible Heads: ONLY AGAINST HOUSE PROPERTY INCOME ITSELF.

Important Note:

1. It can be carried forward even if the return has been filed after Due Date.

2. Even if the House has been sold by Assessee, S/he can carry forward and set off such Loss.

(ii) C/F and Set off of Business Losses (Other thanSpeculation&35ADBusiness):

Max. Allowed Period:Up to Next 8 A.Y.(excluding the A.Y. to which the loss pertains)

Possible Heads: ONLY AGAINST BUSINESS INCOME ITSELF.

Important Note:

1. To claim the benefit of carried forward losses ASSESSEE MUST BE THE SAME except in the cases of Business Restructures (e.g. Amalgamation, Demerger, etc.) where the carried forward benefit is passed on to the new company.

(iii) C/F and Set off Losses of Speculation Business:

Max. Allowed Period: Up to Next 4 A.Y.(excluding the A.Y. to which the loss pertains)

Possible Heads: ONLY AGAINST SPECULATION BUSINESS INCOME ITSELF.

(iv) C/F and Set off Losses of 35AD Business:

Max. Allowed Period: Indefinite

Possible Heads: ONLY AGAINST 35AD BUSINESS INCOME ITSELF.

(v) C/F and Set off Losses under Capital Gains (Long Term & Short Term both):

Max. Allowed Period: Up toNext 8 A.Y.(excluding the A.Y. to which the loss pertains)

Possible Heads:

- Long-Term Capital Loss---only against-->Long Term Capital Gains.

-Short-Term Capital Loss---against-->Short Term&Long TermCapital Gains both.

(vi)C/F and Set off Losses from Owning & Maintaining Race Horses:

Max. Allowed Period: Up to Next 4 A.Y.(excluding the A.Y. to which the loss pertains)

Possible Heads: ONLY AGAINST OWNING AND MAINTAINING RACE HORSES INCOME ITSELF.

Important Note:

The business of Owning and maintaining race horses must be active in the A.Y in which the loss is being Carried forward and Set off.

4.Special Cases of C/F and Set Off of Losses:

C/F and Set Off of Losses in case of Change in Constitution of Firm:

In case of Change of Constitution of the Firm (e.g. death/retirement of Partner), the loss which belongs to the share of Deceased/Retired Partner cannot be carried forward by Firm/Any of the Remaining partners.

C/F and Set Off of Losses in case of Succession:

When any business has been taken over by way of Succession, then the Person succeeding such business won't be allowed to Carry forward the losses of such business. (But in Case of Inheritance, The Legal Heir can carry forward and set off the Loss).

C/F and Set Off of Losses in case of Amalgamation:

TheBusiness LossesandUnabsorbed Depreciationof Amalgamating Co. (Old) would be transferred to Amalgamated Co. (New) and the New company would be allowed to carry forward Business Losses to NEW 8 YEARS and Unabsorbed Dep. to the Indefinite Period.

C/F and Set Off of Losses in case of Demerger:

TheBusiness LossesandUnabsorbed Depreciationwhich are Directly Linked to the Business Transferred to the Resulting co. would be carry forward and set off by Resulting Co.

C/F and Set Off of Losses in case of Certain Closely Held Companies:

In the case where there is aChange in Shareholdingof Closely Held Company (e.g Pvt. Ltd. Co.) then Carry Forward and Set Off of Losses would beallowed only if at least 51% or morebeneficial shareholder remains the same (i.e. Old).

But the following shall not be taken as the change in shareholding:-

-Change in Shareholding due to Death of Shareholder;

- If the shares are Transferred to the Relatives;

- Change in the shareholding of Indian Company which is Subsidiary of Any Foreign Co. as a result of Amalgamation/ Demerger of such Foreign Company (i.e. the Foreign Holding company itself going into amalgamation/demerger) and the 51% shareholders of such Foreign Holding co. continue with the Amalgamated (NEW) Foreign Company.

5.Some Important Points:

  • To claim the Carry Forward and Set off under any head of income except Income From House Property, the Assessee must have to file the Return of income within the Due Date.
  • Loss from the Exempted source of Income (e.g Agriculture Income) cannot be set off against taxable income. That will be a Dead Loss.
  • No loss can be set off against Casual Incomes[e.g. income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature]

The author can also be reached at Taxeffects.blogspot.com or niteshkbind@gmail.com.

Thanks. Be Helpful to One Another!


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