Having Business, Shares & other Loss because of Covid19? Know how to Set off and Carry forward as per Income Tax Act

Set off and Carry forward of losses as per Income tax act, 1961

Set off and carry forward of loss means adjusting the losses against the profit or income of that particular year. Losses which are not set off against income in the same year can be carried forward to the subsequent years for set off against income of those years.

There are 5 heads of income which are as follows:

1. Income from Salary

2. Income from House property

3. Profit and Gains from business and profession

4. Income from other sources

5. Income from Capital Gain

A set-off could be:

a. An intra-head set-off/ adjustment.

b. An inter-head set-off adjustment.

Intra Head Set off/ Adjustment:

As per section 70 intra head set off means loss from one source of income can be set off against income from another source of income but in the same head of income, except:

1. Speculative business loss can be set off against only speculative business income.
2. Specified business loss can be set off against only specified business income.
3. Long Term Capital Loss (LTCL) can be set off against long term capital gain.
4. Loss from owning and maintaining race horses can be set off against income from owning and maintaining race horses.

Inter Head Set off/ Adjustment:

As per section 71 intra head set off means loss from one source of income can be set off against income from another head of income but in the same previous, except:

1. Speculative business loss can be set off against only speculative business income.
2. Specified business loss can be set off against only specified business income.
3. Long Term Capital Loss (LTCL) can be set off against long term capital gain.
4. Loss from owning and maintaining race horses can be set off against income from owning and maintaining race horses.
5. Short term Capital Loss can be set off only against Short term capital gain or Long-term capital gain.
6. Loss from business cannot be set off against salary.

Notes:

1. For carry forward losses Inter head adjustment not allowed. It means inter head adjustment is not possible in case of carry forward losses.
2. The maximum loss from house property which can be set off against income from any other head is Rs. 2 Lakhs.
3. It is to be remembered that once a particular loss is carried forward, it can be set off only against the income from the same head in the fourth coming assessment years.
4. Whenever income is exempt then losses does not have any tax treatment means it should be ignored.
5. Set off of losses not permissible against unexplained income, investment, money etc.
6. If there is income under any head & eligible losses under any other head, such loss shall be first set off against the income before set off and carry off of losses
7. The losses must be set off as per below order:
   • Current year depreciation
   • Brought forward losses from Business or profession
   • Unabsorbed depreciation.
8. Loss from any lottery, card games, races etc. are not eligible for set off and carry forward and losses cannot be set off against income referred in section 115BB i.e. lottery income, cross word puzzles, income in TV show, etc.

How to set off losses incurred during COVID 19 period?

Because of COVID 19 the businesses are incurring huge losses. The assessee can carry forward or set off the business losses. If assessee is having more than one business then assessee can set off the loss of one business against the profit of another business, other than speculative business profit and specified business income. Business losses can be set off against any other income other than:

1. Speculative Income

2. Long term and Short-term capital gain

3. Income from salary.

If no Income from business is earned during the year then assessee can carry forward the loss, such loss can be carry forwarded for next 8 years and can be set off only against business profit in the coming years. Also, the assessee has to file the return on or before due date in order to carry forward the losses.

How to setoff share market losses?

Person can incur three types of losses i.e. Long-term capital loss, short term capital loss and speculative loss in share market. Below we will understand how to set off and carry forward the losses:

a. Long term capital loss: If a person is incurring Long term capital loss from sale of shares than he can set off the same from Long term capital gain incurred on sale of share or any other asset. Inter head set off is not permissible in case of Long-term capital loss. If no long-term capital gain earned during the year then the assessee has to carry forward the loss to the next year and set off against Long term capital gain incurred in next year. Long term capital loss can be carried forward for 8 years. Also, the assessee has to file the return on or before due date in order to carry forward the Long-term capital losses.

b. Short term capital loss: If a person is incurring Short term capital loss from sale of shares than he can set off the same from Short term capital gain from sale of shares or any other asset. Inter head set off is permissible in case of Short-term capital loss but only against Long term capital gain incurred on sale of share or any other asset or. If no short-term capital gain earned during the year then the assessee has to carry forward the loss to the next year and set off against short term capital gain incurred in next year. Short term capital loss can be carried forward for 8 years. Also, the assessee has to file the return on or before due date in order to carry forward the Long-term capital losses.

c. Speculative loss: Speculative loss is incurred when assessee is involved in speculative trading of shares such as intra day trading of shares leads to either speculative profit or loss. Where a person incurs speculative loss during the financial year than he can set off the same from profit from speculative transaction made during the year. Inter head set off is not permissible in case of speculative loss. If no speculative gain is earned during the year then assessee can carry forward the loss, such loss can be carry forwarded for next 4 years and can be set off only against speculative profit in the coming years. Also, the assessee has to file the return on or before due date in order to carry forward the losses.

Carry forward and set off of losses in case of Certain companies: Section 79

Where a change in shareholding has taken place during the previous year in case of a closely held company, than no loss incurred in any Financial year prior to the current Financial year shall be carry forward and set off against the income of the previous year, if on the last day of the financial year the shares of the company carrying not less than 51% of the voting power held by persons who beneficially held the shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred. It means the persons holding 51% or more shares of the company on the last day the financial year must be the same person or persons who is holding at the beginning of the financial year else the company will not get the benefit of set off or carry forward of the loss incurred in the earlier financial year against the Income of current year.

As per amendment made by Finance Act 2019, even if the above condition of shareholding pattern is not satisfied in case of an eligible start up referred in section 80IAC, the loss incurred in any year prior to the PY shall be allowed to be carried forward and set off against the income of the previous year if all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred continue to hold those shares on the last day of such PY and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.

As per section 79 the following changes in shareholding shall not be considered as change in shareholding:

1. Where the change takes place consequent upon the death of the shareholder.

2. where the change takes place by way of gift of shares to any relative of the shareholder making gift.

3. Any changes in shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of the foreign company subject to the condition that 51% of the shareholders of the amalgamation or the resulting foreign company.

4. Where a change in shareholding takes place in a previous year as a result to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional principal commissioner or commissioner.

5. To a company, and its subsidiary and the subsidiary of subsidiary, where,

a. The tribunal, on an application moved by central government u/s 241 of the companies act, 2013, has suspended the Board of director of such company and has appointed new directors nominated by the central government under section 242 of the said act, and

b. A change in shareholding of such company, and its subsidiary and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by the tribunal under section 242 of the companies act, 2013 after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.

Various provision regarding carry forward losses is covered as below:

The assessee can carry forward the losses incurred in the last year, but he does not have the option of inter head set off the next year. The various losses and their provision under income tax can be as below:

Section	Losses to be carried forward	Brought forward losses set off against	Time limit	Mandatory filing of return
71B	Loss from house property	House property Income	8 years	No
72	Normal business loss	Business Income	8 years	Yes
73	Speculative Business loss	Speculative Business Income	4 years	Yes
73A	Specified business loss	Specified business Income	Unlimited	Yes
74	Short term capital loss	Short term capital gain	8 years	Yes
74	Long term capital loss	Long term capital gain	8 years	Yes
74A	Loss from owning and maintaining race horses	Income from owning and maintaining race horses	4 years	Yes
32(2)	Unabsorbed depreciation	Any Income other than salary	Unlimited	No