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Set off and carried forward loss

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Complete Set off and Carried forward of Losses

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Set off and carried forward loss

  1. 1. STUDENTS STUDY CIRCLE SET OFF AND CARRY FORWARD OF LOSSES PRAVEEN KUMAR P.C praveenkumar@yukthi.co.in
  2. 2. Part:1 Set Off of Loss Part: II Carry Forward of Loss
  3. 3. Set off: it refers to adjustment of losses against the eligible profits of the year . It is governed by section 70 and section 71 of the act. .
  4. 4. Set off Inter Source Inter Head Adjustment Adjustment Within the same head of income With other heads of income (Section 70 ) (Section 71)
  5. 5. Section 70 : Inter source adjustment  Setting off loss of one source against income from other source within the same head .
  6. 6. Examples: Inter source Adjustment • Loss of one self occupied property can be set off against income let out property . • Loss from textile business can be set off against profit of leather business Taxable income from business = ( 500000 – 200000) = 300 000
  7. 7. Rules of inter source adjustment Rule 1. (inter source adjustment) Loss from speculation business can be set off only against profit of a speculation business . Loss from speculation business Profit from non speculation business Loss of non speculation business Profit of speculation business
  8. 8.  That is , loss from a non speculation business can be set off against profit of • Non speculation business • Speculation business  But for setting off loss from a speculation business , you need to necessarily have income from a speculation business.
  9. 9. Rule 2. (inter source adjustment) Loss from activity of owning and maintaining race horses can only be set off against income from same business . That is , it can be set off against profit of a business of owning and maintaining race horses . NOTE : ACTIVITY OF OWNING AND MAINTAINING RACE HORSES IS NOT A SPECULATIVE BUSINESS .
  10. 10. Rule 3. (inter source adjustment) No loss can be set off against winnings from lotteries , crossword puzzles etc . That is casual winnings is not available for set off against any type of loss , irrespective of under which head such loss has occurred .
  11. 11. Rule 4. (inter source adjustment) long term capital loss can only be set off against long term capital gain . THAT IS, • Long term capital loss can be set off only against gain on sale of any other long term capital asset . •It cannot be set off against short term capital gain.
  12. 12.  However , for purpose of set off of short term capital loss , both short term capital gains and long term capital gains are available . Summary : long term capital loss Short term capital gains Short term capital loss Long term capital gains Long term capital loss Long term capital gain
  13. 13. Rule 5. loss from an exempt source of income cannot be set off against profit of a taxable source . Example: Loss from agriculture (Exempt u/s 10) cannot be set off against profit of textile business . Long term capital loss on sale of shares in a recognized stock exchange (Exempt u/s 10(38)) cannot be set off against long term capital gains on sale of house .
  14. 14. Questions Loss of let out property Profit of deemed to be let out property Loss of speculative business Profit of leather business Loss from agricultural activities outside India Income from debenture s
  15. 15. Section 71: Inter Head Adjustment  Under this section , loss which could not be set off u/s 70 ( i.e. by way inter source adjustment ), can be set off against income under other heads .  However it is also subject to certain restrictions or rules .
  16. 16. Example:
  17. 17. Rule1. (Inter head Adjustment) Loss from a speculation business cannot be set off against income of any other head .  It can be set off only against income from a speculation business .
  18. 18. Rule 2. (Inter head adjustment) Loss under the head “profits and gains of business or profession” cannot be set off against income from salary . the term “ business “ in the above sentence refers to non speculation business only , as rule (1) already cover speculation business .
  19. 19. Rule 3. (Inter head adjustment) Loss from activity of owning and maintaining race horses can be set off against income from the same business .
  20. 20. Rule 4. Any loss under the head capital gains cannot be set off against any other head . Long term or short term capital loss cannot adjusted against income of any other head . In short , provisions of section 71 shall not be available for losses under the head “capital gains’’
  21. 21.  However , this doesn’t preclude income under the head “capital gains” for being available for adjustment against losses under other heads . Summary Loss under capital gains Any other head of income Loss under head “house property “ Long term / short term capital gains
  22. 22. Rule 5. No loss can be set off against winnings from lotteries , cross word puzzles , card games etc (casual winnings )
  23. 23. Summary of rules
  24. 24. Summary of rules • Long term capital gains Long term capital loss • Long term capital gains • Short term capital gains Short term capital loss
  25. 25. Summary of rules • Salaries •House property • Business income • Capital gains Income from other sources
  26. 26. Questions: Loss of non speculation business Profit from activity of owning race horses Loss of speculation business Profit from activity of owning race horses U A D Long term capital gains
  27. 27. Summary of Set off Loss:
  28. 28. Part: II Carry Forward of Loss
  29. 29. Carry forward of losses  Losses which could not be set off against income of the assessment year , do not lapse , but are allowed to be carried forward to be set off against income of subsequent years .  Carry forward of losses for each head is governed by different sections which define the no’s of years it can be carried forward for, against which income it can be set off etc
  30. 30. Carried forward Loss:
  31. 31. Section 80 read with 139(3) : Return of Loss  any assessee , who has sustained a loss in any previous year under the head , 1) business or profession 2) capital gains 3) activity of owning and maintaining race horses .  And claims to carry it forward for set off in future years , shall furnish a “Return of Loss’’ u/s 139(3) .  This provision shall apply only to above mentioned losses.  Failure to submit return may render the loss unavailable for set off in future .
  32. 32. Section 32(2) UNABSORBED DEPRICIATION  Concept: depreciation can be charged only to the extent to bring profits to NIL .  Hence if profit < depreciation or , there is no profit , then (depreciation – profit ) is called as “ unabsorbed depreciation’’ . Carry forward :  Set off against: ANY income except salaries and casual winnings .  Priority of set off in future years: (1) Current year depreciation . (2) brought forward business loss if any (3) Unabsorbed depreciation
  33. 33. Problem solving technique : 1st Step : Look for losses which can be set off by way of inter source adjustment . 2nd Step: Next, the losses of CY which could not be set off completely in 1st step must be set off . (Inter 3hredasdte) p: Now consider the carry forward losses from LY and set them off .
  34. 34. Thank You Feed back: praveenkumar@yukthi.co.in

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