SET OFF & CARRY FORWARD OF LOSSES

Lecture Notes

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 WHY SET OFF & CARRY FORWARD
 IF THERE IS A LOSS FROM ONE OR MORE
SOURCES UNDER ONE OR MORE HEADS
OF INCOME

 RULES ARE COVERED U/S 70 TO 80

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 MODE OF SET OFF & CARRY FORWARD
STEP 1- INTER SOURCE ADJUSTMENT
UNDER THE SAME HEAD OF INCOME
(SEC 70)

STEP 2- INTER HEAD ADJUSTMENT IN THE

SAME ASSESSMENT
YEAR (SEC 71)

STEP 3- CARRY FORWARD OF A LOSS

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 INTER SOURCE ADJUSTMENT (SEC 70)
If there is a loss in respect of any source
under any head of income for any Asst year
then it can be set off under any other source
under the same head
EXAMPLES
Business A 100000 House Property X 75000
Business B 70000 House Property Y (40000)
Business C (120000)
Net Result 35000
Net Result 50000
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INTER SOURCE ADJUSTMENT (SEC 70)
EXCEPTIONS:-
 Loss from speculation business

 Long term capital loss

 Loss from activity of owning &

maintaining race horses
 Loss cannot be set off against winnings

from lotteries, crossword puzzles, card

game etc.

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INTER HEAD ADJUSTMENT (SEC 71)
When there is loss in respect of any
head of income for any assessment year
then it can be set off against income
from other heads
EXAMPLE
Salary Income 80000
House Property (30000)

Net Result 50000

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 INTER HEAD ADJUSTMENT (SEC 71)
EXCEPTIONS:-
 Loss in a speculation business

 Long under the head capital loss

 Loss from activity of owning &maintaining

race horses
 Loss cannot be set off against winnings from

lotteries, crossword puzzles , card game

etc.
 Business Loss cannot be adjusted
against Salary Income 7
 OTHER POINTS
 Before adjusting loss u/s 71, one has to set off
the loss u/s 70
 Barring aforesaid five cases, any loss can be set
off against income under other heads of income
for the same year.
 No order of priority is given in the Act.
 (Barring the cases in sec 71) In all other cases a
loss has to be first adjusted against available
income under other heads of income.
 If Income from a particular sources is exempt
from Tax - loss from such source cannot be set
off against income chargeable to tax.
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1. Rs.
Income from house property
170000
Profits & Gains of B or P (150000
)
Income from other sources (147000
(being interest on debentures )
which were purchased out
of borrowed money)

2. Current Next Year

Year
Business (100000) 800000
Income

Long Term C. 230000 300000

G. 9
 CARRY FORWARD OF LOSS
Under the act following losses can be carried
forward:

 Loss under head Income from ‘House Property’

(sec 71B)
 Loss under head ‘P & G of B or P’ (sec 72 & sec
73)
 Loss under the head ‘Capital Gains’ (sec 74)
 Loss from activity of owning & maintaining race
horses (sec 74A)
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 SPECULATION BUSINESS

Transaction in which a contract for the

purchase or sale of any commodity,
including stocks and shares, is periodically
or ultimately settled, otherwise than by the
actual delivery or transfer of the commodity
or scrip's.

 If the assessee carries on both speculative

and non speculative transaction --- income
or loss --- should be determined separately
and distinctly.

 Business expenditure incurred – allocated

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 Exceptions :
Contract in respect of -
•Raw material or merchandise
•Stocks and shares by a Guard against
price fluctuation
dealer or investor
•Member of forward market or a
stock exchange in the course of
jobbing or arbitrage
Speculative business in case of a company:
company
Any part of the business of a company consists in the
purchase and sale of shares of other companies, such
company shall be deemed to be carrying on a speculative
business to the extent to which the business consists of
purchase and sale of such shares.
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 SECTI ON 73 DOES NOT APPLY TO THE
FOL LOWI NG COMPAN Y

 GTI consist mainly of income chargeable

under head Income from HP, CG, Income from
Other Sources.

 Banking or of granting loans and advances or

in units of UTI.

Explanation to sec 73 is not applicable if

shares are purchased as Investments or if the
assessee – company is not engaged in the
business of purchase and sale of shares. 13
 CARRY FORWARD & SET OFF OF
SPECULATION LOSS
 Speculation loss can be set off only
against speculative income
 Loss can be carried forward for 8
yrs.
 Continuity of business not
necessary.
 Filing of Return of loss should be
submitted in time
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 OTH ER P OIN TS TO B E N OTE D
 Banned items
 Entered into on behalf of principal –
non speculative loss of agent.

 Transaction there is a breach of

contract and on a dispute between
parties damages are awarded as
compensation by a arbitration award.
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 CARRY FORWARD & SET OFF OF BUSINESS
LOSS OTHER THAN SPECULATION LOSS
(SEC 72)
 Loss carried forward, can be set off only
against business income
 Losses can be carried forward by the
person who incurred the loss (exceptions to
rule)
 Loss can be carried forward for 8 yrs
 Return of loss should be submitted in time
 Continuity of business not necessary
 Carry forward of unabsorbed depreciation,
capital expenditure on scientific research &
family planning expenditure 16
 CARRY FORWARD OF UNABSORBED
DEPRECIATION (Sec 32(2))
 No time limit is fixed for the purpose of
carry forward.
 In the subsequent year(s) it can be set off
against any head. except winnings from
lotteries, crossword puzzles.
 Continuity of business not relevant.
 Following order of priority is followed.
(1) Current Depreciation
(2) Brought Forward Business loss
(3) Unabsorbed Depreciation
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 CARRY FORWARD & SET OFF OF
LOSS & DEPRECIATION SEC (72A)
Depreciation and Business loss can
be carried forward by a person who
has incurred the loss

Exceptions-
 Amalgamation of Companies
 Demerger
 Conversion of a proprietary
concern/firm into company

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 AMALGAMATION
CONDITIONS-
For Amalgamating company-
 Engaged in business in which the
accumulated losses occurred or
depreciation remains unabsorbed for 3 or
more yrs
 Held continuously as on date of
amalgamation at least 3/4th of book value
of fixed assets held by it 2 yrs prior to the
date of amalgamation. 19
AMALGAMATION

For Amalgamated company-

 Amalgamated company continues to
hold at least 3/4th in book value of fixed
assets of amalgamating company for 5
yrs.
 Continuation of business for min 5 yrs.

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 AMALGAMATION
 Other conditions under Rule 9C to ensure
revival of the business or to ensure
amalgamation is for genuine purpose.
(1)Level of production of at least 50% of installed
capacity of the undertaking before end of 4 yrs
from date of amalgamation and continue to
maintain till the end of 5 yrs. ( Central Govt.
may relax the conditions)
(2)Furnish to Assessing Officer a certificate in
Form No 62 verified by CA in this regard
Incase any of the conditions are not compiled
the set off of the loss or dep. shall be deemed to
be the income chargeable to tax in that year21in
 DEMERGER
 In case of demerger, the accumulated
loss & unabsorbed depreciation of the
demerged company will be allowed to
be carried forward & set off in the hands
of the resulting company.

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 How to compute the loss / depreciation
allowance which will be carried forward in
the hands of the resulting company
 If the loss / depreciation is directly
relatable to the undertakings transferred to
the resulting company then it will be
allowed to be carried forward in the hands
of the resulting company.
 If the loss / depreciation is not directly
relatable to the undertakings transferred to
the resulting company, it will be
apportioned between the demerged
company and resulting company in the
same proportion of assets transferred to the
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 LOSS OF PROPRIETORY CONCERN/FIRM
(SEC 72 A(4))
 When the succession is by fulfilling the condition
laid down in sec 47(xiii) i.e firm is succeeded by
company or sec 47(xiv) i.e proprietary concern
is succeeded by company, the loss or
unabsorbed depreciation of the firm /
proprietary concern shall be deemed to be that
of successor company
 When condition of sec 47(xiii) / (xiv) are not
complied with, the set off of loss or unabsorbed
depreciation made in previous year in the hands
of the successor company shall be deemed to
be the income chargeable to tax in that year in
which such conditions are not complied with 24
 EXAMPLE
 X & Y are two partners of a firm contributing capital
in ratio of 1:3 as on 31st Mar 2002.
 Firm was converted into a company w.e.f Apr 1st
2002. Shares have been allotted to X & Y (1: 3).
 Brought forward business loss of firm were Rs 2.5
lakhs.
 This can be set off against the income of the
company in the PY 2002-03 and can be carried
forward upto PY 2010-11.
 Suppose the loss is set off during the PY 2003-04
and If Y transfers his shareholdings on May 6, 2004
then Rs 2.5 lakh will become income of company
for year 2005-06 25
 LOSSES IN CASE OF CLOSELY HELD COMPANY
( Sec 79)
 In certain cases of closely held companies when
change in shareholding takes place carry forward of
losses will not be allowed
Exceptions:-
 Death of shareholder

 Gift by a shareholder to his relative

 Indian company which is a subsidiary of

foreign company and there is a demerger or

amalgamation of foreign company.
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 LOSSES IN CASE OF CLOSELY HELD
COMPANY
 This section shall not apply to any change in the
shareholding of an Indian company, which is a
subsidiary of a foreign company, as a result of
amalgamation or demerger of a foreign company,
subject to the condition that 51% shareholders of
the amalgamating or demerged foreign company
continue to be the shareholders of the
amalgamated or the resulting foreign company

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 CARRY FORWARD & SET OFF OF LOSS
FROM HOUSE PROPERTY (SEC 71B)

 Applicable from Asst yr 1999-2000

 Loss can be carried forward for 8 yrs
 Return of loss need not be submitted in
time

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CARRY FORWARD & SET OFF OF LOSS
FROM ACTIVITY OF OWNING &
MAINTAINING RACE HORSES (SEC 74A)
 Continuity of Business necessary
 Loss can be carried forward for 4 yrs
 Return of loss should be submitted in
time
 Not applicable for other race animals
 Allowed only to the extent of stake falls
short of revenue expenditure

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 LOSS ON SALE OF SHARES, SECURITIES
OR UNITS (SEC 94(7))
 Sub section (7) has been inserted in sec
94 from Asst Yr. 2002-03
 Record Date means date as may be
fixed by a company / a mutual fund /
UTI for the purposes of entitlement of
the holder of the securities / shares /
units to receive dividend (or income)

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 CONDI TION S T O B E SA TISF IED

 Any person buys or acquires any securities /

shares / units within a period of 3 months
before the record date
 Such a person sells or transfers such
securities / shares / units within a period of
9 months after the record date
 The dividend or income on such securities /
shares / units received (or receivable) by
such person is exempt from tax
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 Consequences if the above
conditions are satisfied
The loss arising to the taxpayer on account
of purchase & sale of securities / shares /
units, to the extent such loss does not
exceed the amount of dividend / income
received (or receivable) on such securities /
shares / units, shall be ignored for the
purpose of computing the income
chargeable to tax

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Example of Dividend Stripping
 X Purchased 1000 Equity shares on May
10, 2003
 FV 10 Rs, MV RS 55.55
 Sold 800 shares on Oct 20, 2003 MV Rs
37
 Sold 200 shares on Dec 20, 2003 MV Rs
20
 Company declared 50% dividend
(record date Aug 3, 2003)
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 800 shares 200 shares
Sale consideration 29600 4000
less: Cost of Acquisiton 44440 11110
Short Term Capital Loss -14840 -7110
Dividend 4000 1000
Whether sec 94(7) is Applicable Yes No
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 CARRY FORWARD & SET OFF OF
CAPITAL LOSS (Sec 74)
Nature of No. Set off Against
Loss of
A) Short term Year
8 Any income under the
s head
capital
Loss
B) Long term 8 Long“capital Gains”Gain
term capital
capital
Loss
 Return of loss should be submitted in
time
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 LOSS/DEPRECIATION OF ONE PERSON
BENEFITING ANOTHER PERSON
 The General Principle is that the loss of one
person cannot be availed for set off & carry
forward by another person unless specified
by special provision

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 LOSS/DEPRECIATION OF ONE PERSON
BENEFITING ANOTHER PERSON
Exceptions:-
 If succession is by way of inheritance

 Carry forward & set off of the losses and unabsorbed

depreciation in case of Amalgamation, Demerger and
reorganisation

 When clubbing provision apply, loss is required to

be clubbed in the same manner as income
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 Recent provisions in the Union
Budget 2004-2005
 In order to prevent abuse of the provisions of the set off
of losses, from the A.Y. 2005-06 any loss under the head
“Profits and gains of business or profession” cannot be
set off against income under the head “salaries”.

 Measures to curb creation of losses via Dividend and

bonus stripping (Sec 94)
Time period of holding the units or shares after the
record date has been increased from 3 months to 9
months from A.Y. 2005-06
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 Recent provisions in the Union
Budget 2004-2005
Loss on sale of original units where bonus units
have been issued, will be ignored and the amount
of such loss shall be considered as the cost of
purchase or acquisition of the bonus units

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Head of income Under Under C/F Set off For how
i.e. loss under same other Allowed against many
the head head u/s head or not which head years
70 u/s 71 allowed

Income from yes yes Yes Same head 8

house property U/s 71B

Non speculative yes yes yes Same head 8

business

Speculative Yes No Yes Speculative 8

business U/s 73 income only

C.G. (short / Yes No Yes Same head 8

long)* U/s 74

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Head of income Under Under C/F Set off For how
i.e. loss under same other Allowed against many
the head head u/s head or not which head years
70 u/s 71 allowed

Income from Yes Yes No No No

other sources

Activity from No No Yes Same activity 4

owning and U/s 74A
maintaining
horse races

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 Example:-
Income from HP 18500
Business Income 5000
Short term CG 22000
Long Term CG 2500
Income from owning & maintaining race horses 15000
Income from card games 16000

Brought forward Business loss of AY 1999-00 12000

Unabsorbed Dep Allowance of AY 1998-99 6000
Long Term CL of AY 2002-03 47200
Brought forward loss from the activity of owning
& maintaining race horse of AY 2001-02 25000
Speculation loss of Ay 96-97 30000
Compute his Gross income for AY 2004-05

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Computation of Income:-
Income from HP 18500
Business Income 5000
Less: B/F loss of AY 1999-2000 -12000 Nil
(7000 C/F up to AY 2007-08)
Long Term CG 2500
Less: B/F long term CL of AY 2002-03 -47200 Nil
( 44700 C/F up to A.Y. 2010-11)
Short term CG 22000
Income from Card games 16000
Income from owning & maintaining race
horses 15000
Less: B/F loss of AY 2001-02 -15000 Nil
( 10000 C/F up to A.Y. 2005-06)
Total 56500
Less: Unabsorbed Dep Allow -6000
Gross total Income 50500
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 Speculation loss can not be set off in the A.Y. 2004-05
in the absence of speculation income
It can not be carried forward as the time limit expires in
A.Y. 2004-05.

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THANK YOU

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