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Chapter 5 : Aggregation of Income, Set-Off and Carry Forward of Losses

Overview

  • Identification of permissible inter-source and inter-head adjustments.
  • Understanding restrictions on inter-source and inter-head set-off of losses.
  • Comprehension of conditions for carry forward and set-off of losses under different heads.
  • Recognition of the maximum period for which different losses can be carried forward.
  • Arrangement of the order of set-off of losses.
  • Application of provisions to determine the total income of an assessee.

Key Topics

Inter-Source Set-Off and Carry Forward of Losses

  • Under Section 70, losses from one source can be set-off against income from another source within the same head.
  • Examples include loss from one business being set-off against income from another business.
  • Long-term capital loss can only be set off against long-term capital gains, while short-term capital loss can be set-off against any capital gain.
  • Speculation losses can only be set off against profits from speculation business, and losses from racehorses can only offset income from racehorses.

Deep Dive

  • Understanding the implications of Section 73 for speculative businesses.
  • Clarification on racing horses activity and its limitations as per Section 74A.

Inter-Head Adjustments

  • According to Section 71, losses under one head can be set off against income under another head.
  • Important restrictions include that business losses cannot offset salary income, and capital gains losses cannot offset any other income.
  • Specific provisions for house property income limit the set-off to ₹2 lakhs against other heads when under certain tax regimes.
  • Unabsorbed losses can typically be carried forward for 8 years under many conditions.

Deep Dive

  • Application of tax deduction methods and their limitations.
  • How Section 115BAC affects the carrying forward of various losses.

Carry Forward Provisions

  • Business losses can be carried forward for a maximum of 8 assessment years under Section 72.
  • Losses from speculation businesses have a carry forward limit of 4 years.
  • Long-term and short-term capital losses can be carried forward for up to 8 years but must follow specific rules for offsets.
  • Specified businesses under Section 35AD do not have a time limit for loss carry forwards.

Deep Dive

  • Analysis of how to manage and leverage trading losses over multiple financial years.
  • Insights on timing and strategic planning for capital gains and losses regarding taxation.

Exceptions to Loss Set-Off

  • Certain losses are not allowed to set off against any income: for example, gambling losses and losses from exempt sources.
  • Income from horse racing cannot be offset against gains from other activities.
  • Inter-source set-off is specifically inhibited for losses under speculative business, capital gains, and residential losses under specific conditions.

Deep Dive

  • Understanding tax evasion techniques and penalties related to incorrect loss set-offs.
  • Case studies highlighting common scenarios of loss set-off failures.

Detailed Calculation Examples

  • Illustrations provide a clear view of how to apply these laws for practical income computation.
  • Breakdown of complex scenarios involving multiple heads in individual income tax.
  • Calculations show the iterative process of netting losses against gains across several years.

Deep Dive

  • Exploration of detailed audit trails for tax returns.
  • Teachable moments from errors in tax loss reporting and their consequences.

Order of Set-Off of Losses

  • Losses under various sections have a prescribed order for set-off: depreciation first, followed by brought forward business losses, etc.
  • Section 72(2) outlines the order for tax adjustments when calculating total income.

Deep Dive

  • Contemplation of income sequencing under tax law: planning for favorable outcomes.
  • Impacts of incorrect ordering on tax liabilities and future loss allowances.

Submission of Return of Losses

  • Section 80 mandates the filing of losses to carry forward into future assessments.
  • Various sections’ provisions clarify which types of losses must be reported.

Deep Dive

  • Investigation of compliance with Section 139(3) and its implications for loss processing.
  • The importance of timely return filings in loss management.

Summary

This chapter on aggregation of income, set-off, and carry forward of losses outlines essential principles of inter-source and inter-head loss adjustments as governed by the Income Tax Act. Key concepts include permissible losses under various income heads, the restrictions on offsetting certain losses, and the conditions under which losses can be carried forward over several assessment years. Understanding the specific provisions for business, speculation, capital gains, and the treatment of exceptional cases, like horse racing losses, is critical for effective tax planning. This guide provides a consolidated view of how to navigate these complexities effectively, applying detailed examples and exploring advanced concepts for comprehensive understanding.