The document summarizes the steps for setting off and carrying forward losses under the Indian Income Tax Act: Step 1 allows inter-source adjustment of losses within the same head of income. Step 2 allows inter-head adjustment across different heads of income in the same year. Step 3 allows carrying forward of losses that cannot be set off in steps 1-2 to future years, with different rules for different types of losses. The document provides details on how losses from house property, business, speculation, capital gains and other sources can be set off and carried forward. It also discusses tax treatment of losses in cases of amalgamation, demerger and business succession.

1. Group : 8
Ayushi Gupta
Hardik Patel
Sumiren Goel

2. Mode to Set Off & Carry forward
STEP : 1 Inter-source adjustment under the same
head of Income.
STEP : 2 Inter-head adjustment in the same
assessment year. (applied only if a loss cannot be
set off under Step : 1.
STEP : 3 Carry Forward of a loss. (applied only if a
loss cannot be set off under step : 1 & 2.

3. STEP : 1 Inter-source adjustment under the same head
of Income [SEC 70]
• The provision of section 70:
 General Rule – If the net result of any assessment year, in respect of
any source under any head of income, is a loss, the assesse is entitled to have
amount of such loss set off against his income from any other source under
the same head of income for the same assessment year.
 Exceptions:
1. Loss from Speculation Business.
2. Loss from a Specified Business.
3. Long-term Capital loss.
4. Loss from the activity of owing and maintaining race horses.
5. Loss cannot be set off against winnings from lotteries, crossword puzzles,
etc.
Cont…

4. Cont…
 Other Points:
1. Barring the aforesaid cases, any other loss can be set off against
any other income within the same head of income:
a. Loss from a house property can be set off against income from any other house
property.
b. Loss from a non-speculation business can be set off against income from
speculation or non-speculation business.
c. Loss from a non-speculation business can be set off against income from
business specified under section 35AD.
d. Short-term capital loss can be set off against any capital gain.
e. Under the head “Income from other sources” loss from an activity (other than
the business od owing and maintaining race horses) can be set off against any
income but other than winning from lotteries, crossword puzzles, etc.
2. If income from a particular source is exempt from tax.
3. If there is income from one source and loss from another source
within the same head of income, one can set off the loss against
income within the same head of income.

5. STEP : 2 Inter-head adjustment in the same assessment
year. (applied only if a loss cannot be set off under Step :
1. [Sec. 71]
• The provision of section 71:
 General Rule – Where the net result of computation made for any
assessment year in respect of any head of income of loss, the same can be set off
against the income from other heads.
 Exceptions:
1. Loss in a speculation business.
2. Loss in a business specified under section 35AD.
3. Loss under the head “Capital Gains”.
4. Loss from the activity of owning and maintaining race horses.
5. Business loss cannot be set off against salary income.
6. Loss cannot be set off against winning from lotteries, etc.
7. Loss from purchase of securities.
Cont…

6. Cont…
 Other Points:
1. Before adjusting loss under section 71, one has to set off the loss under
section 70.
2. Barring the aforesaid cases, any loss can be set off against income under
other heads of income for the same year:
a. Loss under the head “Income from house property” can be set off against business
income, capital gains, salary income or income from other sources.
b. Business loss can be set off against property income, capital gains or other income.
c. A loss under the head “Income from other sources” [not being from the activity of owing
and maintaining race horses] can be set off against salary income, property income,
business income or capital gains.
3. No order of priority is given in the Act. One should try to first set off those
losses which cannot be carried forward to the next year.
4. Barring the cases, a loss has to be first adjusted against available income under
other heads of income. No option is available to set off a loss or not to set off a
loss.
5. Where income from a particular source is exempt from tax, loss from such
source can be set off against income chargeable to tax. For the purpose of section
71, loss of profits must be a loss og taxable profits.

7. STEP : 3 Carry Forward of a loss. (applied only if a loss
cannot be set off under step : 1 & 2.
• If a loss cannot be set off either under the same head or under the
different heads, because of absence or inadequacy of the income of
the same year, it may be carried forward and set off against the
income of the subsequent year. Under the Act, the following losses
can be carried forward:
1. Loss under the head “Income from house property”
2. Loss under the head “Profits and gains of business or profession”.
3. Loss under the head “Capital gains”
4. Loss from activity of owning and maintaining race horses. Other
remaining losses cannot be carried forward.
Cont…

8. Cont…
• Carry forward and set off of business loss other than
speculation loss [Sec. 72] – The right of carry forward and
set off loss arising in a business or profession is subject to the
following restrictions:
1. LOSS CAN BE SET OFF ONLY AGAINST BUSINESS INCOME:
a. Can be set off only against business income.
b. Not necessarily the same business.
c. Loss from a specified business.
2. LOSSES CAN BE CARRIED FORWARD BY THE PERSON WHO
INCURRED THE LOSS.
3. LOSS CAN BE CARRIED FORWARD FOR 8 YEARS.
Cont…

9. Cont…
4. RETURN OF LOSS SHOULD BE SUBMITTD IN TIME.
a. Loss of a speculative or non-speculative business.
b. Short or long-term capital loss.
c. Loss.
5. CONTINUITY OF BUSINESS NOT NECESSARY.
6. CARRY FORWARD OF UNABSORBED DEPRECIATION, CAPITAL
EXPENDITURE ON SCIENTIFIC RESEARCH AND FAMILY PLANNING
EXPENSITURE.
7. UNABSORBED DEPRECIATION.

10. STEP ONE Depreciation allowance of the previous year is first deductible from
the income chargeable under the head “Profits and gains of
business or profession”.
STEP TWO If depreciation allowance in not fully deductible under the head
“Profits and gains of business or profession” because of absence or
inadequacy of profits, it is deductible from income chargeable under
other heads of income [except income under the head “Salaries”] for
the same assessment year.
STEP THREE If depreciation allowance is still unabsorbed, it can be carried
forward to the subsequent assessment year(s) by the same assesse.

11. Carry forward and set off of seculation
loss [sec. 73]
What is speculation business?
It is a contract for purchase or sale of any commodity
including stocks and shares which is periodically settled,
otherwise than by the actual delivery or transfer of the
commodity..
Not being share, stock or commodity it would not be a
speculative transaction

12. Speculative business in case of a
company
If the below mentioned conditions are satisfied the company
shall be deemed to be carrying on speculative business even
if there is no avoidance of tax by the assessee-
1. Taxpayer is a company
2. It is a company whose principal business is other than that
of banking or granting of loans and advances.
3. The business of the company consists of of the purchase an
sale of shares of other companies.

13. • Speculative loss can be set off only against speculative
income- loss from speculative business can be carried forward
to the subsequent year and set off only against the profit
from a speculative business carried on that year.
• Can be carried forward for 4 years- such loss can be carried
forward for four assessment years immediately succeeding
the assessment year for which the loss was first computed.
• Continuity of the business is not necessary- the speculative
business need not be continued in order to carry forward the
loss to the subsequent year in which the loss will be set off.
• Return of loss should be submitted in time
• Different rules for unabsorbed depreciation
• Loss incurred in speculative business in banned items cannot
be carried forward to the next year

14. Carry forward and set off of capital
loss
• Long term capital loss can be set off only against long
term capital gains
• short term capital loss can be set off against short term
or long term capital gains.
• Such loss can be carried forward for eight assessment
years immediately succeeding the assessment year in
which the loss was first calculated.

15. Carry forward and set off of loss from activity of
owning and maintaining race horses
• Loss from such activity can be carried forward and set off
only against income from the business of owning and
maintaining race horses.
• Loss can be carried forward for four assessment years
immediately succeeding the assessment year in which
the loss was first computed.
• Such loss cannot be carried forward unless return is filed
within the time limit of section 139(1).

16. Loss calculation
Amount of stake money xxxx
Less: revenue expenditure incurred by the taxpayer exclusively for the xxxx
purpose of maintaining such horses
Balance ( if negative , it is taken as loss from such activity) xxxx

17. Carry forward and set off of loss from
house property
• If any loss incurred under the head “income from house
property” and such loss is not fully adjusted under other
heads of income in the same assessment year, then the
balance shall be allowed to be carried forward and set off
in the subsequent years against income from house
property to a limit of 8 years.

18. Loss on sale of shares, securities or
units [sec. 94(7)]
• Record date- means such a date as may be fixed by a
company for the purpose of entitlement of the holder of
the securities/shares/units to receive dividend.
Condition 1 Any person buys or acquires any securities/shares/units
within a period of 3 months before the record date.
Condition 2 Such person sells or transfers such securities/shares/units
within a period of 3 months after the record date.(9 months
in case of units)
Condition 3 The dividend or income on such securities/shares/units
received by such person is exempt from tax.

19. • if the above conditions are satisfied-
a. Find out the amount of loss from a transaction which
satisfies the above conditions
b. Find out the amount of dividend/income received or
receivable on the record date which is exempt from tax.
c. if (a) is less than or equal to (b), then loss cannot be
adjusted. Conversely, if (a) is more than (b), then the
difference of (a) and (b) can be set off against income
under the head “capital gains”.

20. •
Sectionof94(7) loss on account
does not permit segregation loss into
of declaration of dividend and loss on account of fall in
market condition. Considers only loss on account of
purchase and sale of securities/unit.
• Deals only loss on account of purchase and sale of
shares/units and is not concerned with entries in the
books of account of an assessee.
• Does not provide time limit of 90 days and provides time
limit of three months.

21. Loss arising in the case of bonus
stripping:
To prevent the practice of bonus stripping,
section 94(8) has been inserted:
Conditions:
• The tax payer buys or acquires any unit within
a period of 3 months prior to the record date.
• Such person is allotted additional units
without any payment on the basis of holding
of such units on such record date.

22. •  Such persons sells or transfers all of the
original units within a period of 9 months
after such record date.
• But he continues to hold all of the bonus
units.

23. Consequences if conditions are not
satisfied:
• The loss arising to the taxpayer on account of
purchase and sale of all of the aforesaid
original units shall be ignored for the
purposes of computing his income chargeable
to tax.
• The amount of loss so ignored shall be
deemed to be the cost of purchase or
acquisition of bonus units as are held by him
on the date of such sale or transfer.

24. Carry Forward and Set-off of Loss
and Depreciation
Generally, depreciation and business loss can
be carried forward by a person who has
incurred the loss. Sections 72A and 72AA
provide a few exceptions to this rule. These
sections are applicable in the following cases:

25. • Amalgamation of companies.
• Demerger.
• Conversion of proprietary concern/ firm into
company.
• Conversion of private company/unlisted
public company into limited liability
partnership.
• Amalgamation of a banking company with a
banking institution.
• Amalgamation or demerger of co-operative
banks.

26. Amalgamation
If the following conditions are satisfied, then the
accumulated loss and the unabsorbed
depreciation of the amalgamating company
shall be deemed to be loss/depreciation of the
amalgamated company for the precious year in
which the amalgamation is effected-

27. Condition 1:There has been-
• An amalgamation of a company owning an
industrial undertaking or a ship or hotel with
another co. ; or
• an amalgamation of a banking company with
SBI or any subsidiary of SBI; or
• an amalgamation of a public sector airlines
with another public sector airlines.
Condition 2: The amalgamating company has
been engaged in the business in which the...

28. accumulated loss occurred or depreciation
remains unabsorbed for 3 years or more
years.
Condition 3: The amalgamated company
has held continuously as on the date of the
amalgamation at least three-fourths of the
book value of fixed assets held by it two
years prior to the date of amalgamation.

29. Condition 4: The amalgamated company
continues to hold at least three-fourths in the
book value of fixed assets of the
amalgamating company which it has acquired
as a result of amalgamation for five years from
the effective date of amalgamation.
Condition 5: The amalgamated company
continues the business of the amalgamating
company for a minimum period of 5 years.

30. Condition 7: The amalgamated company
shall furnish to the Assessing Officer a
certificate form no.62, from a chartered
accountant, with reference to the books of
account and other documents showing
particulars of production. This certificate should
be submitted along with the return of income for
the assessment year relevant to the previous
year during which the prescribed level of
production is achieved and for subsequent
assessment years relevant to the previous
years falling within 5 years from the date of
amalgamation.

31. Consequences if the above conditions
are satisfied:
The accumulated loss and unabsorbed
depreciation of the amalgamating company
shall be deemed to be loss and depreciation of
the amalgamated company for the previous
year in which amalgamation is effected.

32. Consequences if the above conditions
are not satisfied:
The part of brought forward loss and
unabsorbed depreciation which has been set off
by the amalgamated company shall be treated
as the income of the amalgamated company for
the year in which the failure to fulfil the
conditions occurs.

33. Demerger
The accumulated loss and unabsorbed
depreciation of the demerged company will be
allowed to be carried forward and set off in the
hands of the resulting company.
If the loss/depreciation is directly relate-able to
the undertakings transferred to the resulting
company, then they shall be allowed to be
carried forward in the hands of the resulting
company.

34. If the loss/depreciation is directly relate-able to
the undertakings transferred to the resulting
company, then it will be apportioned between
the demereged company and the resulting
company in the same proportion in which the
assets of the undertakings have been retained
by the demerged company and transferred to
the resulting company. The loss so apportioned
will be allowed to be carried forward and set off
in the hands of the demerged company or the
resulting company,as the case may be.

35. Loss of proprietary concern/firm
In the case of succession of business, whereby
a firm is succeeded by a company or
a proprietary concern is succeeded by a
company , the accumulated loss and the
unabsorbed depreciation of the predecessor
firm or proprietary concern, shall be deemed to
be the loss, allowance for depreciation of the
successor company for previous year in
which business reorganization was effected and
the other provisions of the Act shall apply
accordingly.

36. Carry forward of loss/depreciation in
the case of conversion of a company
into LLP:
The accumulated loss/ depreciation of the
predecessor company than it shall be deemed
to be allowance of depreciation of
the successor limited liability partnership for the
previous year in which business reorganization
was effected and the other provisions of the Act
relating to set off and carry forward of loss and
allowance for depreciation shall apply
accordingly.

37. Amalgamation of banking co. with a
banking institution:
Section 72AA permits set off of losses of
banking company in the case of amalgamation
if a few conditions are satisfied.

38. Amalgamation or demerger of co-
operative banks:
The successor can set off and carry forward
loss/depreciation allowance of the predecessor
if a few conditions are satisfied.