The document discusses the concepts of set off and carry forward of losses under the Indian Income Tax Act. It explains that losses can be set off against profits of the same year (set off) or carried forward to future years (carry forward) if not fully set off. There are different rules for set off of losses between different sources of income (inter-source adjustment) and between different heads of income (inter-head adjustment). Long-term capital losses can only be set off against long-term capital gains. Speculation losses can only be set off against speculation profits. Unabsorbed depreciation and business losses can be carried forward for set off in future years.

1. STUDENTS STUDY CIRCLE
SET OFF AND CARRY FORWARD
OF LOSSES
PRAVEEN KUMAR P.C
praveenkumar@yukthi.co.in

2. Part:1 Set Off of Loss
Part: II Carry Forward of
Loss

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. Set off
Inter Source Inter Head
Adjustment Adjustment
Within the same
head of income
With other heads
of income
(Section 70 ) (Section 71)

5. Section 70 :
Inter source adjustment
 Setting off loss of one source against
income from other source within the
same head .

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. 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.  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. 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. 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. 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.  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. 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. 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. 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. Example:

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. 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. 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. 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.  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. Rule 5.
No loss can be set off against
winnings from lotteries , cross word
puzzles , card games etc (casual
winnings )

23. Summary of rules

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. Summary of rules
• Salaries
•House property
• Business
income
• Capital gains
Income
from
other
sources

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. Summary of Set off Loss:

28. Part: II
Carry Forward of Loss

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. Carried forward Loss:

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. 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. 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. Thank You
Feed back:
praveenkumar@yukthi.co.in