Set off and carry forward of Losses

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MODULE II
SET OFF AND CARRY FORWARD OF BUSINESS
Set off of losses is to be done in the in the following ways:
Step 1: Inter source (intra-head) adjustment under the same head of income
(section 70)
Step 2: Inter head adjustment in the same assessment year (section 71). This
will be applicable only if the losses cannot be fully set off under step1.
Step 3: Carried forward of un-utilized losses
The relevant provisions related to set off and carried forward of losses have
been summarized here:
A) Inter source (intra-head) adjustment or set off of losses under the same
head of income:
The process of adjusting the loss of one business against profit of other
business is called inter source or intra head set off of losses. E.g.: Adjustment of
loss from running manufacturing business setoff against profit from trading
business.
If the net result from income from business is a loss, the tax payer is entitled to
have the amount of such loss adjusted against any other source under the same
head of income. In other words LOSS FROM BUSINESS A can be Set Off
against PROFITS FROM BUSINESS B. To the aforesaid rule, following
exceptions should be kept in mind;
1. Loss from speculation business: Any loss incurred from speculation
business can only be set off against other speculation business.
2. Loss from specified business: Any loss incurred from any specified
business under section 35AD can only be set off against profit of any
specified business.

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3. Loss under capital gains: Any loss in the nature of long term capital loss
can only be set off against long term capital gains.
4. Loss from owning and maintaining race horses: Any loss incurred in
business of owning and maintaining race horses can only be set off
against income from owning and maintaining race horses.
5. Loss from winnings from lotteries, crosswords puzzles etc.: By virtue of
section 58(4) a loss cannot be set off if incurred from winnings from
lotteries, crosswords puzzles, house races, card games and any other
game of any sort or from gambling or betting in any form or nature.
Subject to aforesaid Five Situations, any other losses can be set off against any
other income within same head of income, in other words;
1. Loss from house property can be set off against income from another
house property.
2. Loss from non-speculation business can be set off against income from
speculativeor non-speculativebusiness
3. Short term capital loss can be set off against short or long term capital
gain
4. Loss from an activity (other than owning and maintaining race horses)
can be set off against any income except income from winnings from
lotteries, crosswords puzzles.
B) Inter head adjustment or Set off of losses not under same heads of
income
Where the net result of computation of income for any assessment year in
respect of any head of income is loss, the same can be set off against income
from any other head of income subject to following conditions;

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1. Loss from speculative business cannot be adjusted against other head of
income
2. Loss from specified business cannot be adjusted against other head of
income
3. Loss from capital gains cannotbe set off against other head of income
4. Loss from business or profession cannot be set off against income from
salaries
5. By virtue of section 58(4) a loss cannot be set off if incurred from
winnings from lotteries, crosswords puzzles, house races, card games
and any other game of any sort or from gambling or betting in any form
or nature.
6. Where the particular source of income is exempt under the provisions of
income tax laws then any losses incurred from such source cannot be set
off against income chargeable to tax.

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CARRIED FORWARD OF LOSS
Any un-utilized losses are allowed to be carried forward to subsequent years
under the income tax laws subject to period of limitations. Carry forward of
losses is tedious for taxpayers and mostly confusing but with the help of chart
given below, it is very easy to understand.