Set Off Losses Section 70 & 71- Income Tax Act 1961. In this article, we are going to provide information about Set Off Losses under section 70 & 71 of income Tax Act 1961. Set off Losses From one source against Income from another Source under the Same Head of Income. This Set off Losses From one source against Income from another Source under the Same Head of Income comes under the Section 70 of the Income tax Act 1961.
Set Off Losses Section 70 & 71- Income Tax Act 1961
- Computation of pay as you earn Tax – Income Tax Act
- Carry forward and set off of losses – Certain Assessees
- Carry Forward of Losses – Income tax Act 1961
The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called intra-head adjustment, e.g. Adjustment of loss from business A against profit from business B.
Income of a person is computed under five heads. ‘Sources’ of income derived by an individual may be many but yet they could be classified under the same head. Consider a situation where Harish has two properties – one, occupied by him and the other, let out. Harish pays interest on loan of Rs 1.50 lakh on the property occupied and derives net rental income of Rs 1.50 lakh from the let-out property. In case of a self-occupied property, income is computed as nil and interest expenditure results in loss. The loss of Rs 1.50 lakh can be set off against rent income of Rs 1.50 lakh; the income chargeable under the head ‘House property’ will be ‘Nil’.
Thus, in general, if the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee is entitled to set off the amount of such loss against his income from any other source under the same head.
However, the following are the exceptions to general rule:
1. Loss from speculation business cannot be set of against profit from an non speculation business however loss from non speculative business can be set-off against speculation income)
2. Long Term Capital Loss (LTCL) can only be set off against Long Term Capital Gain (LTCG) and cannot be set off against Short term Capital Gain (STCG) however STCL can be set off against LTCG)
3. No loss can be set-off against casual income i.e. Income from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.
4. No expenses can be claimed against casual income
5. Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.
6. Loss from an exempted source cannot be set off against taxable Income- If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax. E.g., Agricultural income is exempt from tax, hence, if the taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against any other taxable income.
7. Loss from business specified under section 35AD cannot be set off against any other income except income from specified business (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building a housing projects, etc.).
(A) Set Off Losses -Loss from business or profession
Any loss from business or profession (other than speculation business or loss from the activity of owning and maintaining race horses) can be set off against the income from any other business or profession including the income from speculation business or income from the activity of owning and maintaining race horses
If any business has been discontinued during the year, the loss from such business can also be set-off from the income of other business or profession.
The loss suffered by a wholly owned subsidiary company cannot be set-off by the parent company, since both are separate assessees. Similarly, where loss incurred by a wholly owned subsidiary company is reimbursed by the holding company, the subsidiary company does not use the right to carry forward and set-off the loss. [C.I.T. v. Handicraft Handloom Export Corporation (1982) 133 ITR 590 (Delhi)].
(B)Set Off Losses – Loss from speculation business
Such loss can be set-off only against the income from speculation business. It is not essential that the nature of the other speculation transaction must be the same. Speculative transactions in different commodities and in different markets are to be treated as one business. However, a loss from an illegal speculation business cannot be set-off against income from any lawful speculation. [C.I.T. v. K.J. Kotecha 107 ITR 101 (SC)]. Similarly, where the assessee earns commission on speculative transactions, he is not entitled to set-off speculative loss against such commission because there is no element of speculation in the commission [C.I.T. v. Pangal Vittal Nayak & Co. Pvt. Ltd. (1969) 74 I.T.R. 754 (S.C.)]. By virtue of an explanation to Section 73 where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads: “Interest on securities”, “Income from House Property”, “Capital gains”, “Income from other sources”, or a company the principal business of which is the business of banking or granting of loans and advances) consists of the purchase and sale of shares of other companies, such company shall for the purpose of this section (Section 73), be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
Set-off of loss from one head against income from another head [Section 71]
After making intra-head adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head against income from other head, E.g., Loss under the head of house property to be adjusted against salary income.
A person may have various sources of income computed under different heads of income. Loss under one head of income is generally allowed to be set off against income under another head.
For instance, X has only one property, which is occupied by him and the loss is Rs 1.50 lakh. He derives salary of Rs 10 lakh during the year. Here, he can set off the loss of Rs 1.50 lakh against his salary income by making appropriate declarations to his employer, thereby making his net taxable income Rs 8.50 lakh.
The provision of Section 71 reads as under:
(a) an assessee not having any income under the head “Capital gains” and having loss from income under other heads (excluding capital gains) can set off such loss against his income under any other head (other than “capital gains”);
(b) loss under any head of income (other than “capital gains”) can be set off against income from any head of income, including “capital gains”;
(c) loss under the head “capital gains” cannot be set off against income under any other head. It must be set off only against income from “capital gains”.
(d) Loss under the head “Profits and gains of business or profession” cannot be set off against the head “income from Salaries”.
(e) Where the assessee incurs any loss under the head income from house property it can be set off against the assessee’s any other income under other head during the previous years where such loss is not fully adjusted under other heads of income in the same assessment year, then the balance loss shall be allowed to be carried forward and set off in subsequent years subject to a limit of eight assessment years against income from house property.
(f) Loss incurred by an assessee from a source, income from which is exempt, cannot be set-off against income from a taxable source
There are certain exceptions to the general rule that Loss under one head of income is allowed to be set off against income under another head.
a) Loss from speculative business cannot be set off against any other income. However, non-speculative business loss can be set off against income from speculative business. For Example: House property loss can be set-off against Speculative Incomes but speculation loss cannot be set off against House property)
b) Business loss cannot be set-off against salary income. (It can be set-off against other incomes) c) Loss under the head Capital Gains (LTCL or STCL) cannot be set-off against any other head however Loss from other heads can be set-off against Capital Gains. For an instance, House Property loss can be set-off against CG but LTCL or STCL cannot be set off against HP, i.e., house property Income.
d) No loss can be set off against Casual income such as winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.
e) No expenses can be claimed against casual income.
f) Loss from the business of owning and maintaining race horses cannot be set off against any other income.
g) Loss from an exempted source cannot be set off (e.g. Share of loss of firm, agricultural income, cultivation expenses)
h) Loss from business specified under section 35AD cannot be set off against any other income (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building housing projects, etc.)
It may be noted that Before making inter-head adjustment, the taxpayer has to first make intra-head adjustment.
Above article is an clear cut explanation of Set off Losses From one source against Income from another Source under the Same Head of Income and Set off losses from one head against income from another head [Section 71].
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