SET OFF AND CARRY FORWARD OF LOSSES

Tax is levied on the total income of the Assessee. Total Income is calculated by aggregating the
Income of the Assessee from different heads.

Set Off and Carry forward of losses: -

Set off and C/F of losses can be divided into two categories
(i) Set off of Losses and
(ii) Carry Forward of Losses.

SET OFF LOSSES:-

If loss from one head of Income can be set off against the profit of another head of Income, then it is
called as “SET OFF” of losses. It is divided into two categories.

A. WITH IN THE HEAD:-

Loss from one source of Income within the same head of income can be set off against income from
another source under the same head of income.
For Example:- Loss from cycle business can be adjusted against profits from chemical business.

The following are exceptions from this rule:

1) Loss from Speculation Business:- Loss from speculation business can be set off only against the
profits from speculation business.

2) Long Term Capital Loss:- Long term capital loss can be set off only against long term capital gain
only.

3) Loss from owning and maintaining race horses:- Loss incurred in the business of owning and
maintaining race horses cannot be set off against income from maintaining race horses.

4) Loss cannot be set off against winning from lotteries, cross word puzzles, etc.:- A loss cannot
be set off against winning from lotteries, cross word puzzles, races including horse races, card games
and other games of any sort or form gambling or betting.

B. INTER HEAD ADJUSTMENTS:-

When loss from one head of Income can be set off against profits of another head of income is called
as inter head adjustments.
E.g., Loss on house property can be set off against income from business and profession.

The following are the exception from this rule:-

1) Loss in a Speculation Business:- Loss in a speculation business cannot be set off against any
other income.

2) Loss under the head Capital Gain:- Losses under the head “Capital Gain” cannot be set off against
any income except income under the head Capital Gain.

3) Loss from the owning and maintaining race horses:- Losses from the activity of owing and
maintaining race horses cannot be set off against profits on owning and maintaining of race horses.
4) Loss cannot be set off against casual income:- A loss cannot be set off against casual income.

CARRY FORWARD OF LOSSES:-

If losses cannot be set off against Income either under with in the head or under inter head because
of in adequacy of the income of the same year that tosses can be carry forward to next year.

The following losses can be carry forward and set off in subsequent year: -

1) House Property:- Loss under this head can be carry forward for 8 succeeding previous year to be
set off from income under the head house property only.

2) Speculation Business Loss:- It can be C/F for 4 succeeding Previous Year to be set off only from
Speculation gain, in any of the 4 Previous Years

3) Business loss:- it can be carried forward for 8 previous years succeeding the relevant previous
years to be set off from any business income. Loss of discontinued business can be carry forward
with effect from AY 2000 –01.

4) Unabsorbed Depreciation:- With effect from 2002–03 depreciation that remains unadjusted, as
either there is no income or loss in the previous year, it can be carry forward till it is fully adjusted
from any income during the succeeding Previous Year. It shall be treated as depreciation of the
succeeding Previous Year.

5) Capital Loss:- It can be Carried Forward to 8 Previous Year succeeding the relevant Previous Year
to be set off only from Capital Gain, if any.

6) Expenditure incurred of maintenance of Horse races:- It can be carried forward for 4 succeeding
Previous Year to be set off only from income of same activity if any.

PROBLEMS

1) Shri. Sudhir an individual submits the following information relevant for the AY 2010 – 2011:-
 Particulars Profit Loss
Salary income 84,000
Income from house property
House X 30,000
House Y 34,000
House Z 42,000
Profits & gains from business or profession
Business A 16,000
Business B 20,000
Speculation Business (C) 22,000
Speculation Business (D) 46,000
Capital Gains
Short term capital gain 12,000
Short term capital loss 56,000
Long term capital gain 25,000
Income from other sources
Card games 38,000
Betting 30,000
Loss from card games 14,020
Loss on maintenance of race horses 12,000
Interest on securities 8,000

Compute gross total income for the AY 2010 – 2011.

2) Mr. John a resident individual submits the following information relevant to the PY 2009 – 2010

Particulars Amount Particulars Amount

Salaries 72,000 Capital Gains:- STCL (13,000)
LTCG 7,000
Income from house property Other Sources:-
House I 24,000 Income from securities (20,000)
House II (60,000) Bank interest 10,000
House III (20,000) Income from card games 30,000
Business Income Income from betting 30,000
Business I 25,000 Loss from gambling (60,000)
Business II (20,000) Income on maintenance of race horses
Business Speculative (III) 40,000 At Chennai (40,000)
Business Speculative (IV) (75,000) At Bangalore 30,000

Determine the gross total income for the AY 2010 – 2011

3) The assessment of Mr.Gangaram for the years 2009 – 2010 and 2010 – 2011 is given below:-

Particulars AY 2009 - 2010 AY 2010 - 2011

Income from salaries 40,000 60,000

Income from House property – 1 (25,000) (45,000)

Income from House property – 2 10,000 28,000

Income from business

• Dealing in spares (1,40,000) 5,00,000
• Manufacturing cycles
 Profit before depreciation 2,05,000 4,00,000
 Depreciation 1,65,000 5,00,000
• Speculative Transactions (55,000) 45,000

Capital Gains:-
• STCG on shares 24,000 42,000
• LTCG on debentures 26,000 62,0000
• STCL on House Property (1,00,000) NIL
• LTCL on Land (50,000) NIL

Income from other sources:-

• Bank interest 500 5,000
• Income from securities (8,000) (29,000)
• Race winnings 6,000 12,000
• Lottery winnings 10,000 NIL
• Purchase of lottery tickets NIL 16,000