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Unit 4: Set-off and Carry Forward of Losses

Introduction Notes

Income-tax is a composite tax on the total income of a person earned during a period of one
previous year. There might be cases where an assessee has different sources of income under the
same head of income. Similarly, he may have income under different heads of income. It might
also happen that the net result from a particular source or head may be a loss. This loss can be
set off against other sources or head in a particular manner. For example, where a person carries

on two businesses and one business gives him a loss and the other a profit, then the income

under the head ‘Profits and gains of business or profession’ will be the net income i.e. after the
adjustment of the loss. Similarly, if there is a loss under one head of income, it should normally
be adjusted against the income from another head of income while computing the Gross Total
Income, of course subject to certain restrictions. These provisions for set off or carry forward and
set off of loss are contained in sections 70 to 80 of Income-tax Act.

4.1 Set-off and Carry Forward of Losses: Meaning and Scope

As discussed in the earlier units an assessee may have income from various sources like
employment, business, interest, rent, etc. For the purpose of income tax we divide these incomes
into five heads namely:

1. Income from salaries,

2. Income from house property,
3. Income from business & profession,
4. Capital gains, and
5. Income from other sources.

Similarly an assessee may have three to four sources of income under one particular head.
For example a person might have two businesses A and B which are two sources of income
under the same head business and profession. Similarly a person might be having two part time
employments. He will receive salary from both the employers; each salary received is a source of
income. But both are taxable under the head ‘Income from Salary.’

While one endeavours 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 recognise this and provide for adjustment and utilisation of the losses.
However, there are conditions which have been introduced to prevent misuse of such provisions.
To the common taxpayer, income tax is a crunch into the income earned. Accordingly, awareness
of the relevant provisions pertaining to set off and carry forward of losses is essential in order to
maximise tax benefi ts.

When income from a particular head and a loss from another head or same head are adjusted, it is
called ‘set off of loss against income’. A loss when not set off due to legal bar or due to insuffi ciency
of income from other eligible source or head, it may be carried forward to a subsequent year for
set off against income of that year.

Example: If a company experienced a negative Net Operating Income (NOI) in year one
but positive NOI in one of the next two to seven years, the company could reduce its tax expense
for one of those years by applying the loss experienced in the fi rst year.
In the past, some equities have had large options redemptions that have caused share prices to
plummet dramatically. Due to the increased amount of shares outstanding, investors who sell off
their shares during that time will incur capital losses. Investors can carry forward these losses in
order reduce tax liabilities on future capital gains.

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