Set-Off & Carry Forward – A Complete Summary

Do you have Losses?? Have you also faced the losses in past years as well?? It’s sad to know that you have to confront the losses.! But do you know that there are some uses of these losses too? And these losses can somehow be used to make you benefitted. Enough of Quizzes.! Right?? But I am not kidding. That’s a fact that your losses are not just dead straight away. They can be utilized somewhere and this is the concept which we are gonna discuss today.

This concept is called the Set-Off & Carry Forward of Losses. Through this, we could use our Losses to adjust against our income. And in this way, our losses provide us the tax benefit. So, Let’s understand it very comfortably and in a bit details:

People earned income under various ‘heads’ and also from various ‘sources’ under the same head. So, It might also be possible that they could be having Losses under any particular Source/Head. This Loss of One Sources/Head can be adjusted against Income of other Source/Heads. This is called Set- Off of Losses.
Further, When Losses of any year is more than the Income of that year then the remaining Loss can be taken over to the next years and then set off. That is what called Carry Forward of Losses.

[Note: Sometimes people get confused about these two terms as in many places we could see these two words together i.e. Carry forward and Set off of Loss. Therefore, I would like to make a clear distinction in these two;
* Set-Off = When only “Set-Off” word is used. Then it means to Adjust the Losses of the current year with the profit of current year. 
* Carry Forward = It always means “Carry Forward and Set-Off” of loss which is taking the excess losses of the current year to the next years and then adjust with the profit of those coming years.]

As we discussed above, income/losses may be coming from different Heads or even different sources under the same head and therefore the manner in which losses can be Set Off would also be on these two bases:

(i) Intra-Head Set Off [i.e. adjust within same head]

(ii) Inter-Head Set Off [i.e. adjust with other heads]

The Losses from one source can be set off against the income from another source but under the same head. It can also be called as Inter-source.

For example- Loss from Business A can be set off against the profit from Business B. Here, Business A is one source and Business B is another source but both are under the same head i.e PGBP.

There are some exceptions to this normal Inter-Head Set-Off. There are some Losses which can be not be set off against any other source. These are as follows:

– Losses from Speculation Business;

– Losses from the Activity of Owning and Maintaining Race-Horses;

– Long Term Cap. Loss can’t be set off against Short Term Capital Gains;

– 35AD business loss [can only be set off against 35AD Business income].

After making the intra-head adjustment (if any) the next step is to make an inter-head adjustment. If in any year, the taxpayer has incurred a loss under one head and has income under other head, 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.

– All 4 exceptions as mentioned under Intra-Head set off.

Note:1- If there is a Loss under House Property Head, then such loss can be set off against other heads but ONLY TO THE EXTENT OF RS. 2,00,000. Rest of the Loss can be carried forward to the next years. But in next years such loss SHALL BE SET OFF ONLY AGAINST HOUSE PROPERTY INCOME. (FA, 2017)

3. What is the manner of Carry forward (C/F)?

(i) C/F and Set off of Loss under House Property Head:

Max. Allowed Period: Up to Next 8 A.Y. (excluding the A.Y. to which the loss pertains)
Possible Heads: ONLY AGAINST HOUSE PROPERTY INCOME ITSELF.

Important Note:
1. It can be carried forward even if the return has been filed after Due Date.
2. Even if the House has been sold by Assessee, S/he can carry forward and set off such Loss.

(ii) C/F and Set off of Business Losses (Other than Speculation & 35AD Business):

Max. Allowed Period: Up to Next 8 A.Y. (excluding the A.Y. to which the loss pertains)
Possible Heads: ONLY AGAINST BUSINESS INCOME ITSELF.

Important Note:
1. To claim the benefit of carried forward losses ASSESSEE MUST BE THE SAME except in the cases of Business Restructures (e.g. Amalgamation, Demerger, etc.) where the carried forward benefit is passed on to the new company.

(iii) C/F and Set off Losses of Speculation Business:

Possible Heads: ONLY AGAINST SPECULATION BUSINESS INCOME ITSELF.

(iv) C/F and Set off Losses of 35AD Business:

Max. Allowed Period: Indefinite
Possible Heads: ONLY AGAINST 35AD BUSINESS INCOME ITSELF.

(v) C/F and Set off Losses under Capital Gains (Long Term & Short Term both):

Max. Allowed Period: Up to Next 8 A.Y. (excluding the A.Y. to which the loss pertains)
Possible Heads: 
– Long-Term Capital Loss—only against–>Long Term Capital Gains.
– Short-Term Capital Loss—against–> Short Term & Long Term Capital Gains both.

(vi) C/F and Set off Losses from Owning & Maintaining Race Horses:

Max. Allowed Period: Up to Next 4 A.Y. (excluding the A.Y. to which the loss pertains)
Possible Heads: ONLY AGAINST OWNING AND MAINTAINING RACE HORSES INCOME ITSELF.
Important Note:
1. The business of Owning and maintaining race horses must be active in the A.Y in which the loss is being Carried forward and Set off.

4. Special Cases of C/F and Set Off of Losses:

C/F and Set Off of Losses in case of Change in Constitution of Firm:

In case of  Change of Constitution of the Firm (e.g. death/retirement of Partner), the loss which belongs to the share of Deceased/Retired Partner cannot be carried forward by Firm/Any of the Remaining partners.

C/F and Set Off of Losses in case of Succession:

When any business has been taken over by way of Succession, then the Person succeeding such business won’t be allowed to Carry forward the losses of such business. (But in Case of Inheritance, The Legal Heir can carry forward and set off the Loss).

C/F and Set Off of Losses in case of Amalgamation:

The Business Losses and Unabsorbed Depreciation of Amalgamating Co. (Old) would be transferred to Amalgamated Co. (New) and the New company would be allowed to carry forward Business Losses to NEW 8 YEARS and Unabsorbed Dep. to the Indefinite Period.

C/F and Set Off of Losses in case of Demerger:

The Business Losses and Unabsorbed Depreciation which are Directly Linked to the Business Transferred to the Resulting co. would be carry forward and set off by Resulting Co.

C/F and Set Off of Losses in case of Certain Closely Held Companies:

In the case where there is a Change in Shareholding of Closely Held Company (e.g Pvt. Ltd. Co.) then Carry Forward and Set Off of Losses would be allowed only if at least 51% or more beneficial shareholder remains the same (i.e. Old).
But the following shall not be taken as the change in shareholding:-
– Change in Shareholding due to Death of Shareholder;
– If the shares are Transferred to the Relatives;
– Change in the shareholding of Indian Company which is Subsidiary of Any Foreign Co. as a result of Amalgamation/ Demerger of such Foreign Company (i.e. the Foreign Holding company itself going into amalgamation/demerger) and the 51% shareholders of such Foreign Holding co. continue with the Amalgamated (NEW) Foreign Company.

Amendment- If here is change in shareholding due to resolution plan approved under the Insolvency and Bankruptcy Code, 2016 then such change in shareholding shall not be considered for calculating the above 51%. In short, such change would not be considered as Change in Shareholding. [FA, 2018]

 

5. Some Important Points: