Question 5. Write brief notes on the following:
iv) Provisions Regarding set–off of Losses
Concept of set-off of losses
In simple words, “Set-off” means adjustment of losses against the profits from another source/head of income in the same assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits, then such losses are carried forward to the next assessment year for adjustment against the eligible profits of that year.
Inter source adjustment [Section 70]
The losses incurred by the assessee in respect of one source shall be set-off against income from any other source under the same head of income, since the income under each head is to be computed by grouping together the net result of the activities of all the sources covered by that head. In simpler terms, loss from one source of income can be adjusted against income from another source, both the sources being under the same head.
Inter-source set-off, however, is not permissible in the following cases –
a) Long Term Capital loss
- Where the net result in respect of any short term capital asset is a loss, such loss shall be allowed to be set-off against income, if any, for that assessment year under the head “capital gains” in respect of any other capital asset, and
- Where the net result in respect of any long-term capital asset is a loss, such loss shall be allowed to be set-off only against LONG TERM CAPITAL GAINS.
b) Speculation loss – A loss in speculation business can be set-off only against the profits of any other speculation business and not against any other business or professional income. However, losses from other business can be adjusted against profits from speculation business.
c) Loss from the activity of owning and maintaining race horses cannot be set -off against the income from any other source other than the activity of owning and maintaining race horses
Loss from an exempt source cannot be set -off against profits from a taxable source of income.
Inter head adjustment [Section 71]
Loss under one head of income can be adjusted or set of f against income under another head. However, the following points should be considered:
- Where the net result of the computation under any head of income (other than Capital Gains) is a loss, the assessee can set-off such loss against his income assessable for that assessment year under any other head, including Capital Gains.
- Where the net result of the computation under the head “Profits and gains of business or profession” is a loss, such loss cannot be set off against income under the head “Salaries”.
- Where the net result of computation under the head “Capital Gains‟ is a loss, such capital loss cannot be set-off against income under any other head.
- Speculation loss and loss from the activity of owning and maintaining race horses cannot be set off against income under any other head.