Income Tax Provision for set off & carry forward of Losses.

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Income Tax Provision for set off & carry forward of Losses

In the FY 2017-18, Mr. Ghanshaym has earned Rs. 12 Lakh from Business whereas he has incurred a loss of Rs. 29 Lakh on sale of shares. Even though there is a net loss of Rs. 17 Lakh still he would be liable to pay the tax on Rs. 12 Lakh. Mr. Ramnath has earned Rs. 18 Lakh from Business “A” whereas he has incurred a loss of Rs. 20 Lakh in business “B”. Effectively, there is a net loss of Rs. 2 Lakh & Mr Ramnath won’t be liable to pay any tax as loss from one business is allowed to be set off against profit of another business. Income Tax Act contains provision for set off & adjustments of losses which is subject to various terms & conditions. Let us have a look at the broader provision of such adjustment for tax optimization:

  1. Intra Head Adjustment:
    Intra Head Source adjustment means set off loss under the same head of income. Normally, the losses from one source of income can be set off against income from another source under the same head of income. For example, Loss in Business “A” can be set off against income of another Business “B” in which Business A is one source and Business B is another source and the common head is “Income from Business”. However, there are few riders attached to an intra-head adjustment:
    i. Losses from speculative business can be set off against profit of speculative business only.
    ii. Loss from an activity of owning and maintaining race-horses is allowed to be set off only against the profit from such activity.
    iii. Long-term capital loss (LTCL) is allowed to be adjusted against Long Term Capital Gain (LTCG) only. Interestingly, a short-term capital loss (STCL) can be set off against both, LTCG or STCG.
    iv. Losses from few specified business is allowed to be set off only against profit of such specified businesses only. Specified business means business of cold storage, hotel, infrastructural facility which has claimed deduction u/s 35AD.
  2. Inter-head Set Off:
    After the intra-head adjustments, the taxpayers can set off remaining losses against income of other heads. For example, loss under the head “Income from House Property” can be set off against “Income from Salary”. The rule of inter head set off is subject to the following exceptions:
    i. Loss from House property can be set off against income under any other head subject to a max cap of adjustment of Rs. 2 Lakh. Loss over & above Rs. 2 Lakh can be carried forward for set off in subsequent years.
    ii. Regular Business loss (other than speculative business) can be set off against any head of income except salary income.
    iii. Following losses can’t be set off against any other heads of income:
    a. Speculative Business loss
    b. Capital Losses
    c. Specified business loss
    d. Losses from an activity of owning and maintaining race-horses

Provision for Carry Forward (C/F) of Loss:
After making above permissible intra-head and inter-head adjustments if there remains losses than such unadjusted losses can be c/f for set off against income of subsequent years. Needless to say, it is also subject some riders which are as under:

  1. Losses from House Property can be C/F up to next 8 assessment years & can be adjusted only against “Income from House property”.
  2. Losses from Regular Business (non-speculative Business) can be C/F for 8 years & can be adjusted only against regular business income.

iii.   Speculative Business Loss can be C/F for 4 years for adjustment against Income from speculative business only.

  1. Specified Business Loss u/s 35AD loss as mentioned above can be adjusted only against Income from specified business u/s 35AD. However, there is no time limit to C/F such losses.
  2. Loss under the head “Income from Capital Gain” can be C/F up to next 8 years & is allowed to be adjusted only against long-term capital gains. Short-term capital losses can be set off against long-term capital gains as well as short-term capital gains.
  3. Losses from owning and maintaining race-horses can be C/F up to next 4 years & is allowed to be set off against income from such activity only.

Special Provision:

  1. If income of any particular source or nature is exempt from tax then loss from such source or nature cannot be set off against any other source of Income.
  2. Casual Income (i.e. crossword puzzles, winning from lotteries, races, card games, betting etc) is not allowed to be set off against any other income of the taxpayer.

III. Business loss, capital gain loss, horse race loss can be c/f forward only if the income tax return is filed within due date.

  1. No loss or set off is permissible for income chargeable to tax as unexplained cash credit, unexplained money/investment etc u/s 68 & 69A/B/C/D.

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