The colour of money

The Income-Tax Act, 1961, allows set-off and carry-forward of the loss incurred by any
assessee subject to some restrictions Apart from other information, the new income-tax
forms, ITR-1 to ITR-8, notified by the Central government seeks details on set-off of
losses. Now almost every assessee has to give this information. Therefore, one has to
be aware of the exact provisions relating to set-off. Otherwise there is every possibility
of claiming incorrect set-off.
Loss in common parlance is understood as excess of expenses over income. The
Income-Tax Act, 1961, allows set-off and carry-forward of the loss incurred by any
assessee subject to some restrictions. Let us see the relevant provisions relating to set-
off of losses under the different heads of income:
* Loss from Business/profession [Sec 72]
* Any loss under the head, profit and gain of business, other than speculation loss and
depreciation can be set off against any other business income or any other head of
income, except salary income, in the same assessment year.
* After such setting off, if the resultant figure is yet a loss (business loss): If the loss in
greater than income from any other business or income from any other head, then such
loss can be carried forward up to eight assessment years. On carrying forward to
subsequent years, this loss can be set off only against business income and not against
any other head of income.
* Speculation loss can be set off only against speculation profit in the same assessment
year. But even after such setting off if the resultant figure is a loss, then it can be carried
forward for set off in subsequent years up to four assessment years. From assessment
year 2006-07 up to assessment year 2005-06 such loss could be carried-forward for
eight assessment year. In subsequent years, setting-off of the loss is allowed only
against speculation profit [Section 73].
Transactions in derivatives entered into on recognised stock exchange through a broker
or a Securities and Exchange Board of India (Sebi)-recognised intermediary and
supported by a time-stamped contract note is excluded from the definition of speculative
transaction [Section 43(5)(d)]. Thus, such loss is to be treated in the same manner as
non speculative business loss.
Speculative business loss can be set off against only speculative business income. But
non-speculative business loss can be set off against any business income (whether
speculative or non speculative) .
* Depreciation can be set off in the same assessment year as well as in the subsequent
assessment years against business income or any other head of income except salary
income. Further, depreciation can be carried forward indefinitely for set-off in
subsequent years [Section 32(2)].
As unabsorbed depreciation can be carried forward for any number of years. In
subsequent years, one must first set off current years depreciation, then brought
forward business loss and then the unabsorbed depreciation.
* Continuity of business is now not necessary for the purpose of set-off and carry-
forward.
* Loss from a house property [Sec 71B]
* Loss arising from a house property can be set off against income from any other
house property or income from any other head in the same assessment year.
* If income from house property is negative even after such set-off, then such loss can
be carried forward up to eight assessment years for set-off. But in subsequent years, it
can be set off only against income from house property.
* Loss from capital gains (Section 70 74)
* Short-term capital loss can be set off against any capital gain income, long term or
short term, in the same assessment year. It should be noted that such loss can be set
off only against capital gain income and not against any other head of income. Balance
short-term capital loss if any can be carried forward up to eight assessments years. In
the subsequent years also, it can be set off against any capital-gain income.
* Long-term capital loss
i) Long-term capital loss arising on sale of capital asset other than equity shares and
units of equity-oriented mutual fund which are subject to securities transaction tax (STT)
can be set off in the same assessment year as well as in subsequent assessment years
(in case of carry-forward) only against long-term capital gain income. Carry-forward of
loss is allowed up to eight assessment years.
ii) Long-term capital loss arising on sale of equity shares and units of equity-oriented
mutual fund, which is subject to securities transaction tax (STT), is not allowed to be
either set off or carried forward (as income from such source is exempt from tax)
[Section 14A].
* Loss under the head Other sources (Section 71)
Any loss under the head, Other sources can be set off in the same assessment year
against income from any other source or income from any other head. Salary,
business/profession . The loss cannot be carried forward for set-off in future.
* Loss from owning and maintaining race horses [Section 74A] Any loss arising from
owning and maintaining race horses can be set off against income from such activity
only in the same assessment year or in subsequent assessment years (in case of carry-
forward). In case of this loss, it is allowed to be carried forward up to four assessment
years.
Loss under any head can be set off against speculative income, capital gain income,
income from maintaining race horses. But the reverse is not possible. Loss from
speculation, loss under capital gain and loss from maintaining race horses can be set
off only against the respective specific income. In other words, loss from speculation
can be set off only against speculation income. Loss from capital gain can be set off
only against capital gains income and so on.
A loss from any source cannot be set off against winnings from lotteries, crossword
puzzles, races (including horse races), card games, other games or any sort of
gambling or betting. Loss on bonus stripping/dividend stripping cannot be set off against
any income. Return of loss must be filed within due date of filing of return or else carry-
forward of loss to the subsequent year is not allowed. However, this condition does not
apply in case of house property loss and unabsorbed depreciation.