Set Off and Carry Forward of Losses for CFP

Mode of set off and carry forward – The three steps

Step 1	Inter source adjustment   under the same head of income
Step 2	Inter head adjustments in   the same assessment year Step 2 is applied only if   a loss can not be set off under step 1
Step 3	Carry forward of loss Step 3 is applied only if   a loss cannot be set off under step 1 and 2

General rule:

• ™If the net result for any assessment year in respect of any source, falling under income other than “capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head
• This may also be referred as intra-head adjustment

Exception:

• ™ Loss from speculation business: Shall be set off only against income of another speculation business
• ™ Losses from the activity of owning and maintaining race horses
• ™ Loss on account of lottery, crossword puzzles, gambling or betting etc.
• ™ Capital loss: STCL can be set off from any capital gain (STCG/LTCG). But LTCL can be set off only against LTCG
• ™ Dividend stripping: When any person buys or acquires securities or units within a period of 3 months prior to the record date, And sells or transfers shares within a period of 3 months or units after 9 months after such date

Other Points:

• ™ Loss from a house property can be set off against income from any other house property
• ™ Loss from non speculative business can be set off against income from speculative or non speculative business
• ™ Short term capital loss can be set off against any capital gain
• ™ Under the head, Income from other source loss from an activity (other than business of owning  and maintaining race horses) can be set off against any income, but other than winning from lotteries, crossword puzzles etc.

Inter Head Adjustment Sec 71

• ™ After setting of losses against income under the same head, the net result of the computation under any head of income, other than capital gains is a loss, the assessee shall be entitled to have the amount of such a loss set off against any other head

Exceptions:

• ™ Losses under the head capital gain: Such a capital loss whether ST or LT, shall not be allowed to be set off against income under any other head
• ™ Losses under the head business or profession: In respect of any assessment year, if there is a loss in this head and assessee has income under the head salary, such set off is not allowed. However it shall be allowed to set off from any other head.

Carry forward and Set off of Capital Loss Section 74

• ™ If the net result of the computation under the head ‘capital gain’ is a loss the whole of the loss shall be carried forward
• ™ Long term capital loss can be set off only against LTCG
• ™ STCL can be set off against STCG or LTCG
• ™ Such loss can be carried forward for 8 assessment years immediately succeeding the AY in which the loss was first computed
• ™ Such loss cannot be carried forward unless return is filed

Carry forward and Set off of Loss from House Property Sec 71B

• If the assessee incurs any loss under this head and such loss is not fully adjusted under other head of income in the same assessment year, then such loss is allowed to be carried forward and set off in subsequent years (subject to a limit of 8 AY) against income from HP
• Remember: Once a particular loss is carried forward it can be set off only against income from same head in the forthcoming AY

Losses on sale of shares, securities or units [Sec. 94(7)]

• When any person buys or acquires securities or units within a period of 3 months prior to the record date, And sells or transfers shares within a period of 3 months or units after 9 months after such date
• ™ And the dividend or income is received which is tax exempt
• Then any loss arising out of the sale of such securities to the extent of such dividend or income shall be ignored for the purpose of computing his income chargeable to tax

X purchased on May 10, 2011, 1000 equity shares of Rs.10 each in A ltd.@55.55. On October 20, 2011, he transfers 800 equity shares @37 per share and remaining 200 shares are transferred on December 20, 2011 @ 20 per share. A Ltd. declares 50% dividend (record date August 3, 2011). During the year he has generated long term capital gain of Rs.76,000 on sale of gold.

1. Rs.73,890/-
2. Rs. 59,050/-
3. Rs. 58,050/-
4. Rs. 72,890/-

Vinod invests Rs. 1,50,000 in shares of XYZ ltd on 1st December 2005 and receives a dividend of Rs. 25,000 on 31st March 2006, the record date. The investment is sold on 2nd June 2006 in NSE for Rs. 1,20,000. How much short term loss, if any, arising out of this investment is allowable for set-off in FY 2006-07?

1. Rs. 25,000.
2. Rs. 5,000, since provisions of Sec. 94(7) will apply.
3. Nil.
4. Rs. 30,000.

Carry forward and Set off of Business Losses:

•  Assessee has the right to carry forward the losses in case where it can not be set-off due to inadequacy of income under any other head in the same year
• ™ Losses from the business of speculation are treated separately
• ™ Carried forward losses can be set off only against the income from business and profession only
• ™ Successor of the business cannot carry forward or set off the losses of his predecessors except in case of succession by inheritance
• ™ Loss can be carried forward for 8 years
• ™ Losses from the speculative business can be set off only against income from speculative business (it may be the same or some other speculative business)
• Loss in speculation business can be carried forward for a maximum period of 4 years

 

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Income from Other Sources for CFP

Basis of Charge Sec 56

• ™Income from other sources is the last and residual head of income
• Sub-section (1) covers any income which does not fall under any other head of income
• Sub-section (2) specifies 8 incomes which are always taxable under this head

1	Dividend	Dividend from Indian co. is not taxable in the hands of   shareholders Any dividend from foreign company is taxable here
2	Winning from lotteries	Lotteries, crossword, puzzle, horse race, gambling etc are taxable   here
3	Employee’s contribution towards staff   welfare scheme	Any sum received by assessee from his employees as contribution   towards staff welfare scheme or provident fund is taxable in the hands of   employer
4	Interest on securities	Interest on debentures, Government securities/ bonds is taxable   here
5	Rental income from machinery, plant, or   furniture	Its taxable here
6	Rental income from machinery, plant,   furniture along with building and two lettings are not separable	Its taxable here
7	Sum received under key man insurance policy	Its taxable here
8	Gift	If any sum of money received during previous year without   consideration by individual/HUF from any person or persons exceeding   Rs.50,000 the whole of such amount is taxable in the hands of recipient

Gifts

If any sum of money/property received during previous year without consideration by individual/HUF from any person or persons on or after 1/4/2006 exceeding Rs.50,000 the whole of such amount is taxable in the hands of recipient.

After 1^st Oct. 2009

Nature of   receipt	Sum   taxable
Any immovable property received   without consideration, the stamp duty valuation of which exceed Rs.50,000	Entire value of property equivalent to   the amount of stamp duty valuation
Any movable property received without   consideration and value of which exceeds Rs.50,000	The whole of the aggregate fair market   value will be chargeable to tax

Gifts Not Treated As Income

• Any sum/property received from relative
• Any sum/property received on the occasion of marriage of individual
• Any sum/property received under a will or by way of inheritance
• Any sum/property received in contemplation of death of the payer

Relative means

• Spouse of the individual
• Brother and sister of the individual
• Brother and sister of the spouse of the individual
• Brother and sister of the either of the parents of the individual
• Lineal ascendant or descendant of the individual
• Lineal ascendant or descendant of the spouse of the individual

Casual Income

• Income from gambling, betting, lotteries, horse races, quiz etc. are casual incomes
• Taxed at a flat rate of 30% (plus 10% surcharge and 3% education cess)
• Tax is deducted at source on payment
• Where assessee does not maintain any separate books account, money received will be taxable in the year of receipt and not in the year of declaration of prize.