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A PROJECT REPORT ON SET OFF OR CARRY FORWARD

LOSSES AN ANALYSIS

Submitted by:

Submitted to:

Ayushi

Mr. R.V. Vishnu Kumar

201224

Tax Law Faculty

VII sem

ACKNOWLEDGMENT
I take this opportunity to express my profound gratitude and deep regards to my guide Mr
R.V.Vishnu Kumar for his guidance, monitoring and constant encouragement throughout the
course of this semester on project set off or carry forward losses an analysis. The blessing,
help and guidance given by him time to time have only made it possible the successful
completion of the project.

TABLE OF CONTENTS
INTRODUCTION
OBJECTIVE
HYPOTHESIS
SCOPE OF THE STUDY
RESEARCH METHODOLOGY
STEPS INVOLVED IN SET OFF AND CARRY FORWARD LOSSES
SET OFF OF LOSSES
SET OFF WITHIN THE SAME HEAD OF INCOME OR INTER HEAD SET OFF
CARRY FORWARD AND SET OFF OF LOSSES FROM HOUSE PROPERTY
CARRY FORWARD AND SET OFF OF LOSSES OF BUSINESS AND PROFESSION
CARRY FORWARD AND SET OFF OF LOSSES OF CAPITAL GAINS
CARRY FORWARD OF LOSS IN CASE OF CHANGE IN THE CONSTITUTION OF
BUSINESS
PROVISIONS RELATING TO CARRY FORWARD OF LOSS IN CASE OF RETIREMENT
OF A PARTNER FROM A PARTNERSHIP FIRM
CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CHANGE IN THE
CONSTITUTION OF FIRM OR ON SUCCESSION (SECTION 78)
SPECIAL PROVISIONS RELATING TO CARRY FORWARD AND SET OFF OF LOSS IN
CASE OF A COMPANY IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED
CONCLUSION
REFRENCES

INTRODUCTION
The public finance domain of Economics deals with principles/cannons of taxations. There are
various models of Taxation but in the developing economies progressive system of taxation has
been advocated which means a person having larger income should contribute more to the public
exchequer in comparison to the person having lesser income. While dealing with the subject, it
has been envisaged that if a person has profits/income he should pay taxes if he has profit and
losses simultaneously he should pay tax on net profit after deducting the losses and if he has
resultant loss or only loss he is not required to pay taxes. However, due to the complexity and
need it has been thought of to incorporate the provisions relating to set off and carry forward of
losses. Additional complexity has been created and the losses have been restricted to be set off
due to greediness of the legislators and tax administrators.
If the losses could not be set off under the same head or under different heads in the same
assessment year, such losses are allowed to be carried forward to be claimed as set off from the
income of the subsequent assessment years.
The set off and carry forward of losses can be sub divided into two broad categories:1. Set off of losses.
2. Carry forward and Set off of losses.
OBJECTIVE
The objective of this project is:
To study the method of carry forward the losses
To study the limitation of carry forward of losses
HYPOTHESIS
The researcher has made certain assumption in the beginning of the research project which is
going to be tested during the project when losses can set off and under what heads and under
what conditions they cannot be done. Tax being a very important matter is the carry forward
done properly or not?

SCOPE OF THE STUDY


The research is a doctrinal research. The researcher here would like to study though the judicial
viewpoints by its decision given in various cases. The researcher has tried to analysis the topic by
studying various authors, experts, cases of The Indian Apex Court and High courts, articles, etc.
The steps involved in set off and carry forward losses would be dealt in brief and there would be
reference to partnership firm and company also.

The researcher has strictly followed the

boundary and has studied only with reference to Indian authors, experts, cases, etc.
BENEFIT OF STUDIES
The benefit which will be derived from the research work of this project will be very helpful in
conducting further research work related to set off or carry forward losses. After the study of this
topic, it will be easy for the author to further conduct any research successfully. One can easily
develop easy understanding of this topic.
STATEMENT OF PROBLEM / RESEARCH QUESTION
Most of the time general people set off their losses in the same assessment year and they dont
have the idea of carry forwarding of losses or any such concept. Mostly they dont have any
detail knowledge of law. Sometime it also happen that people show on their losses and take the
benefit at large of this provision and make a good amount of money without paying any tax.
RESEARCH METHODOLOGY
The present research study is mainly a doctrinal and analytical. Keeping this in view, the
researcher has gone through different books, journals, Web references, E-journal, reports etc.
The relevant material is collected from the secondary sources. Materials and information are
collected both legal sources like books.
LEGAL PROVISION
As we know there are three steps for set off and carry forward of loss its necessary to follow the
sequence for the same.
Income under the Income Tax Act is taxable under five heads:

1. Income from salaries


2. Income from house property
3. Income from business or profession
4. Income from capital gains
5. Income from other sources it is possible for an individual to have income under more
than one head. The Income Tax Act has prescribed rules to set-off loss arising from one
head against other heads of income.1
STEPS INVOLVED IN SET OFF AND CARRY FORWARD LOSSES
Set-off means the process of reducing ones income using losses under other heads or same head
of income.
Procedure for setting off losses:
Step 1. Set-off loss from same head of income Inter source adjustment Step 2. If the loss is
still existing, loss can be set-off from other heads of income (subject to certain restrictions)
Inter-head adjustments Step 3. If loss still persists, the same can be carried forward to the
subsequent assessment years Carry forward of losses Step 1 - Inter source adjustment: Under
each head of income mentioned, there may be more than one source of income. For example, a
person can have two or more businesses under the head Business Income. Under the IT Act,
loss from one source of income can be set-off against another source of income under the same
head i.e. Loss from a cloth business can be set-off against gain in a catering business. The
restrictions to this form of setting off are as follows: a. Loss from speculative business can be
set-off only against gain from speculative business and not any other business income. b. Loss
from the activity of owning and maintaining race horses can be set-off only against gain arising
from the activity of owning and maintaining race horses and not any other income. c. Long term
capital loss can be set-off against long term capital gains and not short term capital gains. Step 2
- Inter head adjustment: If the losses cannot be set-off fully through inter source adjustment, they
can next be set-off against other heads of income. This is called inter-head adjustment. The IT
Act has prescribed specific rules setting off of losses between different heads of income, which
are summarized in the following tables:
1 A fortnightly refresher on Personal Income Tax, last accessed on 10 th October,2015,3:30pm
http://www.karvydistribution.com/

Step 3 - Carry forward of losses: If still the losses cannot be set-off fully through inter head
adjustment, they can be carried forward to the next years. However, the loss so carried forward
can be set-off only against same head of income, i.e. the benefit of inter-source adjustment is
lost. 2
LOSS FROM EXEMPTED SOURCE OF INCOME CANNOT BE ADJUSTED AGAINST
TAXABLE INCOME
If income from a particular source is exempt from tax, then loss from such source cannot be set
off against any other income which is chargeable to tax. E.g., Agricultural income is exempt
from tax; hence, if the taxpayer incurs loss from agricultural activity, then such loss cannot be
adjusted against any other taxable income.
SET OFF OF LOSSES
The term Set-off and Carry forward of losses in simple words, Set-off means adjustments
of losses against the profit 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 edible profit, then such losses are
carry forward to next assessment year for adjustment against the eligible profit of that year. 3 The
maximum period for which different losses can be carried forward for set-off has been provided
in the Act.
The set off of losses are further sub divided in two categories:1. Set off within the same head of income or inter head set off.
2. Set off against other heads of income or intra head set off.
SET OFF WITHIN THE SAME HEAD OF INCOME OR INTER HEAD SET OFF
(SECTION 70)

2 http://www.karvydistribution.com/files,last accessed on 10 th October,2015,4:30pm


3 PANKAJ K AGRAWAL , Carry Forward and Set Off of Losses in tabular form with FAQs, accessed on
10th October,2015, 8:00pm http://assets.cacharya.com

According to section 70, if there is a net result of loss from any source of income during any
assessment year the loss can be set off against the income of any other source within same head
of income.
Exceptions:
1. Loss from speculation business.
2. Long term capital loss w.e.f AY 2004.
3. Loss from activity of owning and maintaining race horses.
4. No loss can be set off against gains from winning from lotteries, crosswords, puzzles, card
games or other gambling.
Set off against other heads of income or intra head set off (section 71).
According to section 71, if there is a net result of loss in respect of any head of income during
any assessment year the loss can be set off against the income of any other head of income.
Exceptions:1. Loss from speculation business.
2. Losses under head capital gains.
3. Losses from the business of owning and maintaining of race horses.
4. Loss from business/profession cannot be set of against income under head salaries (2005-06).
5. Loss from exempt income (loss of profit must be loss of taxable profit).
6. No loss can be set off against gains from winning from lotteries, crosswords, puzzles, card
games or other gambling (section 58(4)).4
CARRY FORWARD AND SET OFF OF LOSSES.

4 CA R K GAUR, set off and carry forward of losses, accessed on 15 th October, 2015, 4:00pm,
http://i2biz.blogspot.in/

If a loss cannot be set off either under the same head or under the different heads due to
absence/adequacy of the income during the same year, such loss may be carried forward to the
next year to be set off against the income of that year. In the present context the losses can be
carried forward to be set off against the income e other subsequent year is possible in the
following heads of income:1. Loss from house property.
2. Loss from business and profession:a) Loss from non-speculation business.
b) Loss from speculation business.
c) Loss on account of depreciation, Capital Expenditure on Scientific Research and Family
Planning.
3. Loss on account of capital gain:a) Loss on account of short term capital gain.
b) Loss on account of long term capital gain.
4. Loss from other sources:a) Only from the activity of owning and maintaining race horses.5
CARRY FORWARD AND SET OFF OF LOSSES FROM HOUSE PROPERTY
In terms of section 71B inserted w.e.f. 1999-2000, it provides that if the loss from the house
property cannot be set off in the year in which it has occurred will be carried forward to be set
off against the income of 8 assessment years subsequent to the assessment year in which the loss
was first computed. If loss under the head Income from house property cannot be fully
adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward to
next year. In the subsequent years(s) such loss can be adjusted only against income chargeable to
5 Raag Vamdatt, set-off-and-carry-forward-of-losses-capital-gains-and-house-property, accessed on 17 th
October, 2015, 3:00pm, http://www.raagvamdatt.com/

tax under the head Income from house property. Such loss can be carried forward for eight
years immediately succeeding the year in which the loss is incurred. Loss under the head
Income from house property can be carried forward even if the return of income/loss of the
year in which loss is incurred is not furnished on or before the due date of furnishing the return,
as prescribed under section 139(1).
CARRY FORWARD AND SET OFF OF LOSSES OF BUSINESS AND PROFESSION:Non speculation business:
The business loss other than speculation loss to the extent of not set off u/s 71 can be carried
forward to the subsequent years unless it is set off but not exceeding 8 assessment years
immediately succeeding the assessment year in which the loss was first computed.
Priority of set off
(a) Current year depreciation, Capital Expenditure on Scientific Research & Family Planning.
(b) Brought forward Business loss.
(c) Brought forward depreciation, Capital Expenditure on Scientific Research & Family
Planning. 6
CARRY FORWARD AND SET OFF OF LOSSES OF CAPITAL GAINS:If loss under the head Capital gains incurred during a year cannot be adjusted in the same year,
then unadjusted capital loss can be carried forward to next year.
In the subsequent year(s), such loss can be adjusted only against income chargeable to tax under
the head Capital gains, however, long-term capital loss can be adjusted only against long-term
capital gains. Short-term capital loss can be adjusted against long-term capital gains as well as
short-term capital gains.

Such loss can be carried forward for eight years immediately

succeeding the year in which the loss is incurred. Such loss can be can carried forward only if

6 MCQ%20set%20off%20and%20carry%20frwrd.pdf, last accessed on 16 th October,2015,4:30pm


http://www.incometaxindia.gov.in

the return of income/loss of the year in which loss is incurred is furnished on or before the due
date of furnishing the return, as prescribed under section 139(1).
If the net result of computation under the head capital gain is a loss, such loss can be carried
forward & set off as under:1. Upto assessment Year 2002-03 Long term capital loss can be set off against any capital
gain whether long term or short term.
2. From assessment Year 2003-04, long term capital loss can be set off against long term
3.
4.

capital gains only.


Short term capital loss can be set off against long term & short term capital gains.
The losses under the head capital gain cant be set off from other heads of income. It

5.

can be carried forward for 8 next assessment years for set off.
The return is required to be filled with in time prescribed under sec 139 of the income
tax act, 1961.

CARRY FORWARD AND SET OFF OF LOSSES & DEPRECIATION IN CASE OF


AMALGAMATION, CONVERSION, MERGER & DEMERGER, (SEC 72A, 72AA,
72AB)
As a matter of general principle the carry forward & set off is permitted to a person who has
incurred these losses. However, there are exceptions to this rule as under:1.
2.
3.
4.
5.

Amalgamation of companies
Demerger
Conversion of proprietary concern/ firm into a company
Amalgamation of a banking company with banking institution.
Merger/Demerger of cooperative banks.7

CARRY FORWARD OF LOSS IN CASE OF CHANGE IN THE CONSTITUTION OF


BUSINESS
Generally, the person incurring the loss is only entitled to carry forward the loss to be adjusted
in subsequent year(s). However, in certain cases of reconstitution of the business like
amalgamation, demerger, conversion of proprietary firm into company or conversion of
7 carry-forward-and-set-off-of-losses-1345-1.html, last accessed on 17 th October,2015,2:30pm
http://www.legalservicesindia.com/article

partnership firm into company, etc., the reconstituted entity is entitled to carry forward the
unadjusted loss of predecessor entity (provided that conditions specified in this regard are
satisfied).
PROVISIONS RELATING TO CARRY FORWARD OF LOSS IN CASE OF
RETIREMENT OF A PARTNER FROM A PARTNERSHIP FIRM
Section 78 contains provisions relating to carry forward and set off of loss in case of change in
constitution of a partnership firm due to death or retirement of a partner (i.e. when a partner goes
out of firm by retirement or death). In such a case, the share of loss attributable to the outgoing
partner cannot be carried forward by the firm. Restriction of section 78 is applicable only in case
of loss and is not applicable in case of adjustment of unabsorbed depreciation, unabsorbed
capital expenditure on scientific research or family planning expenditure.
CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF CHANGE IN THE
CONSTITUTION OF FIRM OR ON SUCCESSION (SECTION 78):
Sec 78(1) Change in the constitution: When a change has occurred in the constitution of a firm, then nothing shall entitle the firm to
have carry forward and set off so much of the loss proportionate to the share of the retired or
deceased partner as exceeds his share of profits, if any, of the previous year in the firm. No
partner can also avail the benefit of the said loss.
Sec 78(2) Succession:Where any person carrying on any business or profession has been succeeded to in such capacity
by another person otherwise than by inheritance, nothing in the chapter VI shall entitle any
person other than the person incurring the loss to have it carried forward and set off against his
income.
SPECIAL PROVISIONS RELATING TO CARRY FORWARD AND SET OFF OF LOSS
IN CASE OF A COMPANY IN WHICH PUBLIC ARE NOT SUBSTANTIALLY
INTERESTED

As per section 79 of the Income-tax Act, where a change in shareholding has taken place in a
previous year in the case of a company, not being a company in which the public are
substantially interested, no loss incurred in any year prior to the previous year shall be carried
forward and set off against the income of the previous year unless- On the last day of the
previous year the shares of the company carrying not less than fifty-one per cent of the voting
power were beneficially held by person who beneficially held shares of the company carrying
not less than fifty-one per cent of the voting power on the last day of the year or years in which
the loss was incurred. Restriction of section 79 is applicable only in case of loss and is not
applicable in case of adjustment of unabsorbed depreciation, unabsorbed capital expenditure on
scientific research or family planning expenditure. Further, the provisions of section 79 are not
applicable in case of change in shareholding on account of death of shareholder or on account of
transfer of shares by way of gift to any relative of the shareholder or change in shareholding in
case of an Indian company which is a subsidiary of foreign company, when such foreign
company is amalgamated/demerged with another foreign company and 51% or more
shareholders of the amalgamating/demerged foreign company continues to be the shareholders of
the amalgamated/resulting foreign company.

CONCLUSION
Set off and carry forward of losses is a very important aspect of tax law. These two things work
as a benefit for the assesse in many conditions so their calculation in correct and proper manner
is very necessary. The project has dealt with the steps in detail and after completing the project it
became clear that the laws relating to the set off and carry forward are very clear and there is no
need of any changes. The calculation is strict but is very properly provided in the Act.

REFRENCES
Websites Referred

www.legalservicesindia.com/article,last accessed on 17th October,2015


www.incometaxindia.gov.in,last accessed on 16th October,2015.
www.raagvamdatt.com,accessed on 17th October, 2015.
www.karvydistribution.com,last accessed on 10th October,2015.