by Set-off and Carry forward of losses are important provisions in the Indian Income Tax Act, 1961. These provisions allow taxpayers to reduce their taxable income by setting off losses incurred in a particular year against their income in subsequent years. In this way, taxpayers can minimize their tax liability and optimize their tax planning strategies.
The provisions for set-off and carry forward of losses are applicable to all types of income, including business and profession, capital gains, house property, and other sources of income. These provisions help taxpayers to mitigate the impact of losses on their financial position, and enable them to make better use of their resources.
Set-off of losses means the adjustment of losses against the income of the same assessment year. The Income Tax Act provides for inter-source set-off, which means that losses from one source of income can be set off against income from another source of income. For example, losses incurred in a business can be set off against income from salary or house property. However, losses from speculative business cannot be set off against income from any other source.
The Income Tax Act also provides for intra-source set-off, which means that losses of a particular source can be set off against income from the same source. For example, business losses can be set off against business income.
The set-off of losses is subject to certain conditions and restrictions. For example, the loss can only be set off against income in the same assessment year if the tax return is filed within the due date. If the return is filed after the due date, then the loss cannot be set off against the income of that year.
Carry forward of losses means that losses incurred in a particular year can be carried forward to subsequent years for set-off against future income. The Income Tax Act provides for the carry forward of losses for a period of eight assessment years from the year in which the loss was incurred.
The carry forward of losses is subject to certain conditions and restrictions. For example, the loss can only be carried forward if the tax return is filed within the due date. If the return is filed after the due date, then the loss cannot be carried forward.
The carry forward of losses is also subject to the following limitations:
- The loss can only be carried forward if it has been set off against income in the same assessment year.
- The loss can only be carried forward to the extent of the amount of loss that could not be set off in the assessment year in which it was incurred.
- The loss can only be carried forward for a period of eight assessment years.
The Income Tax Act also provides for the set-off of unabsorbed depreciation against income in subsequent years. Depreciation is a non-cash expense, which reduces the value of an asset over its useful life. If the depreciation allowance is not fully utilized in a particular year, the unabsorbed depreciation can be carried forward to subsequent years for set-off against future income.
The set-off and carry forward of losses are important provisions for taxpayers as they help to reduce their tax liability and optimize their tax planning strategies. By using these provisions effectively, taxpayers can make better use of their resources and improve their financial position. However, it is important to comply with the conditions and restrictions of these provisions to avoid any adverse consequences.
Question:
Mr. X incurred a loss of Rs. 1,50,000 from his business in the financial year 2020-21. He also incurred a short-term capital loss of Rs. 50,000 and a long-term capital loss of Rs. 80,000 in the same financial year. How can Mr. X set-off and carry forward these losses for the next financial year?
Solution:
Mr. X can set-off his losses in the following manner:
- Business loss: The business loss of Rs. 1,50,000 can be set-off against any income from the following heads:
- Income from house property
- Capital gains
- Income from other sources
Since Mr. X does not have any income from these heads in the financial year 2020-21, he can carry forward the entire business loss to the next financial year.
- Short-term capital loss: The short-term capital loss of Rs. 50,000 can be set-off against any capital gains in the financial year 2020-21. If there are no capital gains, the loss can be carried forward to the next financial year for up to 8 years.
- Long-term capital loss: The long-term capital loss of Rs. 80,000 can be set-off against any long-term capital gains in the financial year 2020-21. If there are no long-term capital gains, the loss can be carried forward to the next financial year for up to 8 years.
The table below summarizes the set-off and carry forward of losses for Mr. X:
| Head of Income | Loss | Set-off Against | Carried Forward |
| Business | 1,50,000 | – | 1,50,000 |
| Short-term Capital Gains | 50,000 | Capital gains or carried forward | 50,000 |
| Long-term Capital Gains | 80,000 | Long-term capital gains or carried forward | 80,000 |
