SET OFF & CARRY FORWARD OF

LOSSES
.

MEANING

While one endeavors to derive income, the possibility of incurring losses cannot be ruled out. Based on the principles of natural justice, a set-off should be available for loss incurred. The income tax laws in India recognize this and provide for adjustment and utilization of the losses. However, there are conditions which have been introduced to prevent misuse of such provisions.

MODE OF SET OFF & CARRY FORWARD

Step 1. Set-off loss from same head of income Inter source "adjustment Step 2. If the loss is still existing, loss can be set-off from other heads of income (subject to certain restrictions) Inter- head adjustments Step 3. If loss still persists, the same can be carried forward to the subsequent assessment years Carry forward of losses

INTRA HEAD ADJUSTMENTS

The restrictions to this form of setting off are as follows: a. Loss from speculative business can be set-off only against gain from speculative business and not any other business income. b. Loss from the activity of owning and maintaining race horses can be set-off only against gain arising from the activity of owning and maintaining race horse and not any other income. c. Long term capital loss can be set-off against long term capital gains and not short term capital gains.

INTER- HEAD ADJUSTMENTS

The restrictions to this form of setting off are as follows: Loss in speculation business Loss under the head Capital Gains Loss from the activity of owning and maintaining race horses. Loss from winnings from lotteries. Business loss cannot be set off against salary.

CARRY FORWARD OF LOSSES

If the loss cannot be set off either under the same head or under the different heads because of absence or inadequacy of the income of the same year, it may be carried forward and set off against income of the subsequent years. Unabsorbed loss under house property, capital loss and business loss can be carried forward for 8 years. Unabsorbed speculation business loss can be carried forward only for a period of 4 years.

SET OFF & CARRY FORWARD IN THE CASES OF CERTAIN COMPANIES (SEC.79)
Sec.79 is applicable if the following conditions are satisfied. 1. The tax payer is the company in which the public are not substantially interest. 2. The persons holding 51% of voting powers on the following dates are different. - On the last day of the previous year in which the loss was incurred - On the last day of the previous year in which the company wants to set off the brought loss.

A subsidiary of a public company whose shares are listed in a recognized stock exchange in India is treated as a company in which the public is substantially interested. On the other hand, a subsidiary of a public company which is not listed in a recognized stock exchange in India will not be entitled to be treated as a company in which public are substantially interested.

EXCEPTION TO THIS RULE

Change in the voting power because of death or gift. Unabsorbed depreciation