The story of losses and set-off claims in I T Act!

By Sachin Jain, CA



'LOSS' in common parlance is understood as excess of expenses over

income. The Income-Tax Act allows set-off and carry-forward of the

loss incurred by any assessee subject to some restrictions. Let us

see the relevant provisions relating to set-off of losses under the

different heads of income:



• Loss from Business/profession [Sec 72] :- Any loss under the

head, 'profit and gain of business,' other than speculation loss and

depreciation can be set off against any other business income or any

other head of income, except salary income, in the same assessment

year.



After such setting off, if the resultant figure is yet a loss

(business loss): If the loss in greater than income from any other

business or income from any other head, then such loss can be

carried forward up to eight assessment years. On carrying forward to

subsequent years, this loss can be set off only against business

income and not against any other head of income.



Depreciation can be set off in the same assessment year as well as

in the subsequent assessment years against business income or any

other head of income except salary income. Further, depreciation can

be carried forward indefinitely for set-off in subsequent years

[Section 32(2)].



As unabsorbed depreciation can be carried forward for any number of

years. In subsequent years, one must first set off current year's

depreciation, then brought forward business loss and then the

unabsorbed depreciation.



Continuity of business is now not necessary for the purpose of set-

off and carry-forward.



• Losses in Speculation business [Section 73] :- Speculation loss

can be set off only against speculation profit in the same

assessment year. But even after such setting off if the resultant

figure is a loss, then it can be carried forward for set off in

subsequent years up to four assessment years. From assessment year

2006-07 up to assessment year 2005-06 such loss could be carried-

forward for eight assessment year. In subsequent years, setting-off

of the loss is allowed only against speculation profit



Transactions in derivatives entered into on recognised stock

exchange through a broker or a Securities and Exchange Board of

India (Sebi)-recognised intermediary and supported by a time-stamped

contract note is excluded from the definition of speculative

transaction [Section 43(5)(d)]. Thus, such loss is to be treated in

the same manner as 'non speculative business loss'.



Speculative business loss can be set off against only speculative

business income. But non-speculative business loss can be set off

against any business income (whether speculative or non

speculative) .



• Loss from a house property [Sec 71B] :- Loss arising from a house

property can be set off against income from any other house property

or income from any other head in the same assessment year.



If income from house property is negative even after such set-off,

then such loss can be carried forward up to eight assessment years

for set-off. But in subsequent years, it can be set off only against

income from house property.



• Loss from capital gains [Section 74] :-



• Short-term capital loss can be set off against any capital gain

income, long term or short term, in the same assessment year. It

should be noted that such loss can be set off only against capital

gain income and not against any other head of income. Balance short-

term capital loss if any can be carried forward up to eight

assessments years. In the subsequent years also, it can be set off

against any capital-gain income.



ii) Long-term capital loss



• Long-term capital loss arising on sale of capital asset other

than equity shares and units of equity-oriented mutual fund which

are subject to securities transaction tax (STT) can be set off in

the same assessment year as well as in subsequent assessment years

(in case of carry- forward) only against long-term capital gain

income. Carry-forward of loss is allowed up to eight assessment

years.



• Long-term capital loss arising on sale of equity shares and units

of equity-oriented mutual fund, which is subject to securities

transaction tax (STT), is not allowed to be either set off or

carried forward (as income from such source is exempt from tax)

[Section 14A].



• Loss under the head 'Other sources' [Section 71] :- Any loss

under the head, 'Other sources' can be set off in the same

assessment year against income from any other source or income from

any other head. Salary, business/profession . The loss cannot be

carried forward for set-off in future.



• Loss from owning and maintaining race horses [Section 74A] :- Any

loss arising from owning and maintaining race horses can be set

off against income from such activity only in the same assessment

year or in subsequent assessment years (in case of carry- forward).

In case of this loss, it is allowed to be carried forward up to four

assessment years.



Concluson :- Loss under any head can be set off against speculative

income, capital gain income, income from maintaining race horses..

But the reverse is not possible. Loss from speculation, loss under

capital gain and loss from maintaining race horses can be set off

only against the respective specific income. In other words, loss

from speculation can be set off only against speculation income.

Loss from capital gain can be set off only against capital gains

income and so on.



A loss from any source cannot be set off against winnings from

lotteries, crossword puzzles, races (including horse races), card

games, other games or any sort of gambling or betting. Loss on bonus

stripping/dividend stripping cannot be set off against any income.

Return of loss must be filed within due date of filing of return or

else carry-forward of loss to the subsequent year is not allowed.

However, this condition does not apply in case of house property

loss and unabsorbed depreciation.



(The views expressed are personal of the author)