What is income and loss?
The term income and losses are common in the present world and are exactly the opposite of one another. Every business runs in order to generate gains or income in order to fulfill its objectives, but it is work of detailed efforts and precision. Any mistake in the decision taken by the owner of the business can lead to heavy business losses. The concept of income and losses are very simple. A situation where the business has its inflows greater than the outflows, the term is denoted by business income and whereas the business outflow is greater than its inflow, the term is denoted by business loss.
Set-Off and Carry Forward of Losses
Business income is always welcomed by the owner of the business and marks the health and prosperity of the business, on the other hand, the other side, that is business loss, brings concerns in the mind of the business owner and is followed by defamatory character of the business. A business can suffer losses by two ways, namely, controllable causes and uncontrollable causes. Controllable causes are those causes which can be controlled by the business owner such as better decision making and efficient management whereas contrary to it, uncontrollable causes are something which is beyond the control of the owner himself. Fire on the business premises, earthquake, natural calamities being some of the most common instances. Therefore, it is very essential to ensure that high amount of precision and punctuality is maintained in the business.
Set off and carry forward
The world of business in spite of various plans and theories still continues to be unpredictable and uncertain; therefore, a need for some flexibility in operations has been witnessed whereby the business owners can have some facility in respect of it. Set off and carry forward is one of the most common reliefs that are provided to the businesses.
Where there is a loss under the head “profits and gains of business or profession” other than losses accruing out of speculation business, and the same loss cannot be set off in the same assessment year due to either by the reason of insufficient amount under the head to set off the accrued loss or by the reason of no income under the head, the same amount of loss can be carried forwarded to the next assessment year. In the succeeding assessment year if there are profits, then such profits can be adjusted with the loss or a part thereof. The above explanation can be clarified with the help of an example: there is an accumulated loss of Rs. 80, 000 in the present assessment year under the head “profits and gains from business or profession” but in the same assessment year, the income under the same year is Rs. 30, 000. Therefore, Rs. 30, 000 shall be adjusted in the same year and the balance Rs. 50, 000 shall be carried forward to the next year. Such phenomenons are known as set off and carry forward.
Set off within the same head of income
As discussed above, the most common phenomenon in the modern trend in set off and carry forward of loss is set off of loss from one source against the income from another source under the same head of income. In this case, where an assessee generates income from other sources within the same head, the same can be adjusted in case of a loss, if any, accruing from one or more sources. An example can clear up things, suppose if an assessee has two houses and the net income from one house is Rs. 48, 000 while from the other house there is a loss of Rs. 30, 000, the loss shall be adjusted against the income as both fall under the same head, that is “Income from House Property, and after the set off is complete and the figure stands at Rs. 18, 000, the same shall be deemed to the income from house property. However, there are certain exception to this rule in form of set off is disallowed in case of loss from a speculative business, hedging contract by an investor in shares, derivative transaction and arbitrage.
Set off against income under another head
Set off against income under another head is also known as inter head adjustment. Inter head adjustment is possible where in respect of any assessment year, if after setting off losses against income under the same head, the net figure of the computation under any head of income, other than capital gains is negative, that is, there is a loss, the assessee shall have the liberty to adjust the same with some other head of income, provided the same shall not be in form of capital gains. For an example: if the head, income from house property is showing a loss of Rs. 5, 000, and the head ‘income from salary’ is Rs. 6, 000, the same shall be adjusted with the head.
But there are certain specific guidelines, as expressed earlier, income from capital gains and other areas such as loss from speculative business, loss of lottery, etc., cannot be brought into the picture.
Capital losses – set off and carry forward
A situation may arise where an assessee might get a capital loss instead of getting capital gain. In such a case, where the net result under the head “capital gain” is negative, the same can be adjusted under the same head in the next assessment year. In case, there are two types of losses in form short term capital loss and long term capital loss then in such a case, the same shall be carried off on separate basis. It shall also be noted that in case there is an excess of long term capital gain and the assessee also has a short term capital loss, then such set of is allowed, but vice versa is not allowed. Set off is permissible upto a period of 8 immediate succeeding years from the year of first set off.
Losses from house property – set off and carry forward
Losses from house property can also be one of the many cases that can be adjusted under carry forward and set-off of losses. This kind of a situation arises in case of a situation where the assessee possesses more than one house and the gain accruing from one of the houses is insufficient to counter the loss accrued from other. Suppose, an assessee has two houses and the gain from one house is Rs. 10, 000 whereas the loss arising out of the other is Rs. 50, 000. Therefore, in such a case, in the current year, Rs. 10, 000 can be adjusted with the gain and the remaining loss of Rs. 40, 000 can be carried forward upto next 8 assessment years for set off.
Business losses/allowances – set off and carry forward
Business losses are the most common form of carry forward of losses. Business is full of uncertainties and hence, it is most probable form of set off and carry forward of losses. The loss accrued can be carry forward to the subsequent assessment year and set off is only against business income of the subsequent year. The form of adjustment remains the same.
Losses from other sources – set off and carry forward
Losses from other sources is a tricky part as it compromises of huge sources which compromises of various aspects like income from speculative business, income from owning and maintaining race horses, carry forward and set off accumulated losses and unabsorbed depreciation allowance in amalgamation or demerger, etc. since, most of these form of incomes are termed as highly risky and are witnessed as a source of pleasure, the maximum permissible limit is allowed till the next preceding year. The losses which are eligible to be carried forward must be set off against profit of the immediately succeeding year and if there is any balance left, it should be set off in the immediately next succeeding year or years within the time allowed.
Firm’s loss
To be very clear about the explanation, there is not much difference between set off in case of a firm and other cases, as both are same in all respect. Although the profits of partnership firm are shared by partners and are exempt in their hands, but losses of firm are not shared among partners. The firm can only set off and carry forward and set off of its own losses and not the partners.
Order of preference for giving effect to set off and carry forward
The order of preference in case of set off and carry forward of loss is very simple. The basic step is to try and adjust and set off the losses under the same head, so that there is no more confusion in the computation and if such is not possible then inter head adjustment is required to be followed. In case, an assessee can also go for carry forward of losses if it is required to do so.
The concept of set off and carry forward can be cleared in a single instance with help of an illustration:
Mr. X has the following information for the previous year 2010-11 relevant to the assessment year 2011-12:
* Profit from business A situated in Delhi- Rs. 1, 50, 000
* Profit from business B situated in Mumbai – Rs. 1, 00, 000
* Loss from business C carried in New York - Rs. 60, 000
* (The business is controlled from India but profits are not received in India)
* Unabsorbed depreciation of business C – Rs. 35, 000
* Income from house property situated in India - Rs. 10, 000
* Income from house property situated in London - Rs. 20, 000
* (Rent received in London)
Computation of total income required assuming Mr. X is a resident of India.
Solution:
| Particulars | Amount (Rs.) |
Business income Business A (Profit)
Business B (Profit)
Business C (loss)
Unabsorbed depreciation of business C
Income from house property
Property in India
Property in London
Gross total income | 1, 50, 000
1, 00, 000
(60, 000)
1, 90, 000
(35, 000)
1, 55, 000
10, 000
20, 000
1, 85, 000 |
