Group : 8 Ayushi Gupta Hardik PatelSumiren Goel

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.

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…

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.

Cont…

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…

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.

Cont…

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…

• 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…

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.

Cont…

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.

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

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 company2. 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.

• 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

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.

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).

Loss calculation

Amount of stake money xxxx

Less: revenue expenditure incurred by the taxpayer exclusively for the purpose of maintaining such horses

xxxx

Balance ( if negative , it is taken as loss from such activity) xxxx

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.

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.

• if the above conditions are satisfied-a. Find out the amount of loss from a transaction

which satisfies the above conditionsb. 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”.

Section 94(7)• does not permit segregation of loss into loss on account 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.

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.

• 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.  

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.

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:

• 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.

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-

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...

accumulated loss occurred or depreciationremains 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.

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.

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.

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.

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.

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. 

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.

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.

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.

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.

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.