Module 5 Setoff and carry forward of losses By Prof. Ashok K. Dubey

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) The concept of set off and carry forward comes into picture only when there is loss in any source of income(except salary). To make it clear let us study in two separations- 1.Set off of losses - Set off of losses is adjusting losses from one head of income with other head of income or within the same head of income in the previous year. In this we have the following two concepts.

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) a.Inter source adjustments (with in the same head of income)(section 70) Inter source adjustment is one, where the loss is set off within the same head of income. EXAMPLE – If Mr. A has two houses and the income from house property is Rs. +45,000 from first house and Rs. -12,000 from the second house, then the net house property income will be Rs. +33,000.

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) b. Inter head adjustment (with other head of income)(section 71) Inter head adjustment is one, where the loss of one head of income is set off against another head of income. For Example - If loss of business income is set off from the income of house property, it is inter head adjustment. EXAMPLE – Loss from business Rs. 50,000, income from house property Rs. 75,000. Loss of business income -50,000 Income from H.P. +75,000 Net Income +25,000

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) Points to be kept in mind in case of set off of losses – i.Loss from speculative business cannot be set off from any other income except income from speculative business. ii.Long term capital loss can be set off only from long term capital gain. iii.Loss from owning and maintaining of race horses can be set off only from any income earned from owning and maintaining of horse races.

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) iii. Any other loss can be set off from any other heads of income (House property loss, Non speculative business loss, short term capital loss and other source loss). v. Loss from business can be set off from house property, capital gains and other sources except salaries.

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) 2. Carry forward and Set off of losses - The concept of carry forward and set off of losses comes into picture only when any loss cannot be adjusted in a particular previous year. If a loss, which cannot be adjusted, will be taken to the next financial year / years to get it adjusted. This method of taking it to the next year / years and get it set off is termed as CARRY FORWARD AND SET OFF OF LOSSES. Study with respect to each heads of income.

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) a.Income from Salary – The question of carry forward and set off will not arise in this head of income because there will be no loss under this head of income. b.Income(loss) from House Property – (i) Loss which cannot be adjusted during a financial year can be carried forward. (ii) Loss can be carried forward for a period of 8 years. (iii) Carried forward loss should be set off only from house property income and not from any other income.(iv) Return of loss should be filed within the time limit.

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) c. Income (loss) from business – i. NON SPECULATIVE BUSINESS LOSS – Loss which cannot be adjusted during a financial year can be carried forward. Loss can be carried forward for a period of 8 years. Carried forward loss should be set off only from business or professional income and not from any other income. It is not necessary that loss should belong to then same business. Continuity of business is not necessary to carry forward and set off. Return of loss should be filed within the time limit.

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) ii. SPECULATIVE BUSINESS LOSS – (Speculative business refers to speculative transactions. Speculative transaction means a transaction, which is settled in all respects other than the actual delivery or transfer of commodity) Loss can be carried forward and set off only from speculative income. Loss can be carried forward for a period of 4 years. It is not necessary that the same business should be continued. Return of loss should be filed within the time limit.

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) d. Income (loss) from Capital gains – Loss, which cannot be adjusted during a financial year, can be carried forward. Loss should be adjusted only from capital gains. Long term capital loss can be carried forward and set off only from long term capital gain and not from short term capital gain. Short term capital loss can be carried forward and set off from both long term and short term gains. Loss cab be carried forward for 8 years. Return of loss should be filed within the time limit.

SET-OFF AND CARRY FORWARD OF LOSSES (SECTION 70 TO 80) e. Income (loss) from other sources – Loss from owning and maintaining of race horse comes under this head. Such loss can be carried forward and set off only against any income from owning and maintaining of race horses. Loss can be carried forward for 4 years. Return of loss should be filed within the time limit.

HOW TO TREAT UNABSORBED DEPRECIATION Unabsorbed depreciation refers to the amount of depreciation, which is still not absorbed from the profit of business or from other heads of income (except salary) in a particular financial year. 1.Depreciation allowance should first be deducted from the income chargeable to profits and gains. Of business. 2.If profits and gains of business is not sufficient then the same should be adjusted with other

HOW TO TREAT UNABSORBED DEPRECIATION 3. Any amount, which is still unabsorbed should be carried forward to next assessment years for set off. 4. There is no time limit regarding the period for which unabsorbed depreciation should be carried forward. It can be carried forward till it is fully written off. 5. The unabsorbed depreciation carried forward can be adjusted with any head of income except salary head of income. 6. If any unabsorbed depreciation is to be set off after carry forward, the following order should be followed. (a) Current dep. (b) B/F losses of business © unabsorbed depreciation.

CLUBBING OF INCOMES (SECTION 60 TO 65) 1.Transfer of Income without transfer of assets (section 60)- (a)Any income arising to any person by virtue of a transfer, without actual transfer of the assets from which such income arises, shall be clubbed in the hands of the transferor. (b)Under this, the ownership of the asset is not transferred. Only the income from such asset is transferred.

CLUBBING OF INCOMES (SECTION 60 TO 65) © Transfer includes any settlement, trust, covenant, agreement or arrangement. (d) The transferor will be taxed for such income. 2. Transfer of income by revocable transfer of assets (section 61,62,63) – (a) Income arising to a person by virtue of a revocable transfer of assets shall be clubbed in the hands of the transferor(section 61).

CLUBBING OF INCOMES (SECTION 60 TO 65) (b) A revocable transfer does not include a transfer by way of trust, which is not revocable during the beneficiary’s lifetime and in other case, which is not revocable during the lifetime of the transferee (section 62). © A revocable transfer is one under which the transferor has right to reassume control over the income or asset (section 63).

CLUBBING OF INCOMES (SECTION 60 TO 65) (d) Transfer includes any settlement, trust, covenant, agreement or arrangement. (e) Revocable transfer is taxed in the hands of the transferor. 3. Income arising to spouse (section 64)- (a) Income of spouse such as salary, commission, fees or any other form of remuneration received from a concern in which the individual assessee has substantial interest

CLUBBING OF INCOMES (SECTION 60 TO 65) (person having 20% voting power or 20% share in profit) will be clubbed with the income of spouse having greater income (section64.1.ii). (b) If the spouse posses technical or professional knowledge and the income is attributable because of these professional skills such income cannot be clubbed (section 64.1.ii). © Spouse refers to Husband or wife.

CLUBBING OF INCOMES (SECTION 60 TO 65) (d) When any such income is once included in the total income of either spouse, such income in any succeeding year shall, not be included in the total income of the other spouse unless the Assessing officer is satisfied. 4. Income from assets transferred without adequate consideration by an individual to his / her spouse (section 64.1.iv)- (a) Any asset transferred without adequate

CLUBBING OF INCOMES (SECTION 60 TO 65) Consideration by an individual to his / her spouse will be taxed in the hands of the individual. (b) If the asset transferred by an individual is used in a business, as part of capital and any income from such business earned by the transferee will also be taxed in the hands of the transferor (section 64.1). © Transfer may be done directly or indirectly. (d) If transfer is done with adequate consideration then the transfer cannot attract clubbing provisions

CLUBBING OF INCOMES (SECTION 60 TO 65) 5. Income arising to son’s wife or daughter in law (section 64.1.vi)- (a)Income arising to son’s wife of an individual, from assets transferred without adequate consideration by the individual to son’s wife, will be included in the income of the individual, who has transferred. (b)Transfer may be direct or indirect. (c)Transfer of asset should be after

CLUBBING OF INCOMES (SECTION 60 TO 65) (d) The relationship of father in law or mother in law and daughter in law should persist both at the time of transfer of asset as well as at the time of accrual of income. (e) Transfer before marriage cannot be considered. 6. Income from assets transferred to a person for the benefit of spouse (section 64.1.vii)-

CLUBBING OF INCOMES (SECTION 60 TO 65) (a)Any income from assets transferred without adequate consideration to a person by an individual for the benefit of spouse will be taxed in the hands of the individual, who has transferred the asset. (b)Transfer may be direct or indirect. (c)Transfer may be to a person or an association of person. (d)Transfer should be for the purpose of immediate or deferred benefit of his / her spouse.

CLUBBING OF INCOMES (SECTION 60 TO 65) 7. Income from assets transferred to a person for the benefit of son’s wife or daughter in law (section 64.1.viii)- (a)Any income from assets transferred without adequate consideration by an individual to a person for the benefit of son’s wife is taxable in the hands of the individual, who has transferred the assets. (b)Transfer of asset should be after (c)Transfer may be to a person or an association of person.

CLUBBING OF INCOMES (SECTION 60 TO 65) (d) Transfer may be direct or indirect. (e) Transfer should be for the immediate or deferred benefit of his / her son’s wife. 8. Income arising to minor child (section 64.1A)- (a) Any income arising or accruing to a minor child (including step child or an adopted child, but not an illegitimate child) shall be included in the total income of the parent, whose total income is greater.

CLUBBING OF INCOMES (SECTION 60 TO 65) (b) Income of a minor child specified u/s 80U (blind, mentally retarded or physically handicapped) cannot be included. © Income of a minor child arising from any manual work or activity involving application of his personal skills, talents cannot be clubbed. It is treated as income of the minor child. (d) When the income of a minor child is included in the total income of either parent, such income in any succeeding year shall not be included in the total income of other parent unless the A.O. is satisfied with the explanation given. (e) If the total income of an individual includes the income of the minor, then he is entitled to an exemption of RS. 1,500 FOR each minor child.

CLUBBING OF INCOMES (SECTION 60 TO 65) 9. Income arising from assets blended in HUF property (section 64.2)- Where any person has converted his own property into the joint family property, any income arising from such converted property, shall be assessed in the hands of the person, who originally converted such property into the HUF property.

AGGREGATION OF INCOMES (UNDISCLOSED INCOME / INVESTMENT OR DEEMED INCOME) 1.Cash credit – section Unexplained investment – section Unexplained money etc. – sec. 69A. 4.Amount of investments etc. not fully disclosed in books of account. 5.Unexplained expenditure etc. – sec. 69C. 6.Amount borrowed or repaid on Hundi – sec.69D.