Page 87 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes

Notes

Set-off of losses: The adjustment of losses from one head against the income, profi ts or
gains of any other head of income during the same tax year is called set-off of losses.
Carry-Forward of Losses: Where the losses are not fully adjusted against the income
of the same tax year and such losses are transferred to the next tax year, this process of
transferring un-adjustable losses to the next year is known as carry forward of losses.

Income Tax Ordinance, 2001 has provided the specific procedure for adjustment and carry
forward of losses sustained by a taxpayer during the tax year.

Specific provisions have been made in the Income-tax Act, 1961 for the set-off and carry forward

of losses. In simple words, “Set-off’ means adjustment of losses against the profits from another
source or head of income in the same assessment year. If losses cannot be set-off in the same year

due to inadequacy of eligible profits, then such losses are carried forward to the next assessment

year for adjustment against the eligible profits of that year. The maximum period for which
different losses can be carried forward for set-off has been provided in the Act.

Did u know? Salary may not be in negative. So, there is no possibility of loss under the head
‘salary’

4.1.1 Inter Source Adjustment (Section 70)

Under Section 70, the losses incurred by the assessee in respect of one source shall be set-off
against income from any other source under the same head of income, since the income under
each head is to be computed by grouping together the net result of the activities of all the sources
covered by that head. In simpler terms, loss from one source of income can be adjusted against
income from another source, both the sources being under the same head.

Example:
1. Loss from one house property can be set off against the income from another house
property.

2. Loss from one business, say textiles, can be set off against income from any other business,
say printing, in the same year as both these sources of income fall under one head of

income. Therefore, the loss in one business may be set-off against the profits from another
business in the same year.
Inter-source set-off, however, is not permissible in the following cases -
1. Long-term capital loss: The set-off and carry forward in case of long-term capital loss is not
permitted:
(a) Where the net result in respect of any short-term capital asset is a loss, such loss shall
be allowed to be set-off against income, if any, for that assessment year under the
head “capital gains” in respect of any other capital asset, and
(b) Where the net result in respect of any long-term capital asset is a loss, such loss
shall be allowed to be set-off against income, if any, for that assessment year under
the head “capital gains” in respect of any other asset not being a short-term capital
asset.

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