ACCOUNTING & TAXATION

Guide to Set Off & Carry Forward of Losses under each head of Income

This article focuses on provisions of The Income Tax Act, 1961 and rules made thereunder relating to Set Off and Carry Forward of Losses. This is a complete guide to set off and carry forward the losses including the set off of losses from business and profession from presumptive income.

1. There are two types of adjustments under set off of losses:
2. Intra Head Adjustment (section 70) – It means loss from one source of income can be set off against income from another source but in the same head of income.
3. Inter Head Adjustment (section 71) – It means loss under one head of income can be set off against income from another head of income but in same previous year*.

Exceptions:

1. Speculative business loss can be set off against speculative business income only.
2. Specified business loss (u/s 35AD) can be set off against specified business income only.
3. Long term capital loss can be set off against long term capital gain only.
4. Loss from owing & maintaining race horses can be set off against income from owing & maintaining race horses.
5. Short term capital loss can be set off against Short term capital gain and Long-term capital gain only.
6. Loss from business cannot be set off against salary income.

*  In case of carry forward losses Inter Head adjustment Not Allowed.

1. Set Off & Carry Forward of Losses:

Types of Losses	Intra   Head Adjustment	Inter Head Adjustment	Carry For warded	Brought Forward Losses to be Set Off against	Time Limit to carry forward	Mandatory filing of return of income
Loss from House Property	Allowed	Allowed, upto Maximum of Rs. 2,00,000 from AY 2018-19	Allowed	Income from House Property	8 Years	No
Loss from Speculative Business	Only against Speculative business income	Not Allowed	Allowed	Income from Speculative Business	4 Years	Yes
Loss from Specified Business	Only against Specified business income	Not Allowed	Allowed	Income from Specified Business	Unlimited	Yes
Other Business Losses	Allowed	Allowed, except from Salary Income	Allowed	Income from Normal Business		Yes
Short Term Capital Loss	Only against STCG & LTCG	Not Allowed	Allowed	STCG & LTCG	8 Years	Yes
Long Term Capital Loss	Only against LTCG	Not Allowed	Allowed	LTCG	8 Years	Yes
Loss from Owing & Maintaining Race Horses	Only against income from Owing & Maintaining Race Horses	Not Allowed	Allowed	Income from Owing & Maintaining Race Horses	4 Years	Yes
Other Loss under ‘Other Sources’	Allowed	Allowed	Not Allowed	N/A	N/A	N/A
Loss from Salary	Loss from Salary Not Possible

 

1. Timely filing of Income Tax Return

In order to carry forward the losses of current assessment year it is mandatory to file Income Tax Return within the timelines specified u/s 139(1) of the Act.

However, the provisions apply only in case of losses of current assessment year and not on the brought forward losses of previous assessment years which are still unutilized and required to be carried forwarded. Also, the losses are allowed to be set off against the income even if the return is filed after due date.

For Example: If a person has Losses of Rs. 1,00,000 brought forwarded from AY 2017-18 and incur losses of Rs. 6,00,000 in current AY 2019-20 and he filed his return of income after the due date of return filing then he is allowed to carry forward Rs. 1,00,000 pertaining to loss of AY 2017-18 but he is not allowed to carry forward the current year loss of Rs. 6,00,000 however, he can set off this loss from the eligible income in the current AY only.

Exception:

House Property loss & Unabsorbed Depreciation can be carry forwarded even if return filed after due date.

 

1. Brought Forward Loss & Presumptive Income

In case a person has brought forwarded losses from the business or profession and in the current assessment year the person files the return of income declaring his income under presumptive scheme specified u/s 44AD or 44ADA or 44AE then he is allowed to set off the brought forward losses from the presumptive income.

In such a case the person is required to file return of income under form ITR-3 declaring his income on presumptive basis under table 61 to 64 of “Part A P & L” of the form and declaring the brought forward losses under “Schedule-CYLA”.

1. Carry Forward of Losses in case of Amalgamation/ Demerger

 

Particular	Amalgamation	Demerger	Conversion of Firm / Proprietary into Company	Conversion of Unlisted Co. into LLP
Accumulated Business Loss	Amalgamating Co.	Demerged Co.	Firm / Proprietary	Unlisted Co.
Can be carry forward by	Amalgamated Co.	Resulting Co.	Successor Co.	LLP
Time Limit to carry forward	Fresh 8 years	Remaining 8 years	Fresh 8 years	Fresh 8 years

 

 

Notes:

1. Only business losses (except speculative business loss) can be carry forwarded by successor.
2. Unabsorbed Depreciation can be carry forwarded by Amalgamating Co./ Resulting Co./ Successor Co./ LLP for unlimited period.
3. The Carry forward of losses by successors are subjected to some conditions specified under the Act.