Set-Off Losses

Inter- source adjustment of loss and restrictions:

If in any year the taxpayer has incurred loss from any source under a particular head of income, then he is allowed to adjust such loss against income from any other source falling under the same head. For Example, Adjustment of loss from business C against profit from business B.​

Following restrictions should be kept in mind before making inter-source adjustment of loss:

  • Loss from speculative business cannot be set off against any income other than income from speculative business. However, non-speculative business loss can be set off​ against income from speculative business.
  • Long-term capital loss cannot be set off against any income other than income from long-term capital gain. However, short-term capital loss can be set off against long-term or short-term capital gain.
  • No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.
  • Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.

Loss from business specified under section 35AD cannot be set off against any other income except income from specified business (section 35AD​ is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building a housing projects, etc.). ​

Example:

1. Mr X has the following income from business & profession:

  • Profit from his professional practice of a lawyer: Rs. 2.5 lakh.
  • Loss from his proprietary business: Rs. 1.75 lakh

Net Income chargeable under Profits & gains from Business & Profession will be Rs. 75,000 (Rs. 2.5 lakh less Rs. 1.75 lakh)

2. Mr. Y has incurred a Short term capital loss of Rs. 15 lakh and has made a long term capital gain of Rs. 32 lakh:

Net Income chargeable under capital gains head is Rs. 17 lakh (Rs. 32 lakh less Rs. 15 lakh).

Inter-Head Adjustment of loss and Restrictions:

If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head against income from other head, E.g.,Loss under the head of house property to be adjusted against salary income.

Following restrictions should be kept in mind before making inter-head adjustment of loss:

  • Loss from speculative business cannot be set off against any other income. However, non-speculative business loss can be set off only against income from speculative business.
  • Loss under head “Capital gains” cannot be set off against income under other heads of income.
  • No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature.
  • Loss from the business of owning and maintaining race horses cannot be set off against any other income.
  • Loss from business specified under Sec 35AD cannot be set off against any other income ( Sec 35AD​ is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building housing projects, etc.)
  • Loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries”.

Before making inter-head adjustment, the taxpayer has to first make inter-head adjustment.

Example: Mr. X submits the following particulars pertaining to AY 2019-20

Particulars Amount
Income from Business 1,00,000
Business loss 80,000
Loss from house property 30,000

Workings for inter-head adjustments:

Particulars Amount Amount
Income from Business 1,00,000  
Less: Business loss (80,000)  
Unutilized Business income 20,000  
Less: Loss from house property (20,000) Nil
House Property loss of 10,000 to be carried forward for set-off in next AY [30,000 – 20,000]    

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