Income Tax Chapter 5: Losses and Set-offs

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Questions and Answers

Which of the following conditions must be met for a loss to be carried forward and set off against income from another business?

  • The loss must have resulted from a house property.
  • The loss must be set off against income from the same business.
  • The loss must have been incurred in the business of speculation.
  • The loss must have been incurred in business, profession, or vocation. (correct)

What is the maximum period for which a business loss can be carried forward?

8 assessment years

Which of these options are correct regarding the set-off of losses under the same head of income? (Select all that apply)

  • Loss from one house property can be set-off against income from another house property. (correct)
  • Loss from textile business can be set-off against profit from printing business. (correct)
  • Loss from a speculative business can be set-off only against income from another speculative business. (correct)
  • Loss from specified business u/s 35AD can be set-off against income from any other specified business. (correct)

Under which circumstances can the loss from the activity of owning and maintaining race horses be set-off against other income?

<p>It can be set-off only against income from the activity of owning and maintaining race horses. (D)</p> Signup and view all the answers

Which losses are NOT allowed to be set off against income from other heads when computing total income under the default tax regime (section 115BAC)?

<p>Unabsorbed depreciation attributed to additional depreciation under section 32(1)(iia). (A), Brought forward business loss from self-occupied house property. (B), Brought forward business loss from a specified business under section 35AD. (C), Brought forward business loss from owning and maintaining race horses. (D)</p> Signup and view all the answers

Which of these options are correct regarding the order of set-off of losses? (Select all that apply)

<p>Current year depreciation is set off before unabsorbed depreciation. (A), Current year capital expenditure on scientific research is set off before current year expenditure on family planning. (B), Brought forward loss from business/profession is set off before unabsorbed capital expenditure. (C), Unabsorbed capital expenditure on scientific research is set off before unabsorbed expenditure on family planning. (D)</p> Signup and view all the answers

Loss from an exempt source can be set-off against income from a taxable source.

<p>False (B)</p> Signup and view all the answers

The loss under the head “Capital Gains” can be set-off against income under any other head.

<p>False (B)</p> Signup and view all the answers

The loss from the activity of owning and maintaining race horses can be carried forward for a maximum period of 8 assessment years immediately succeeding the assessment year in which the loss was incurred.

<p>False (B)</p> Signup and view all the answers

Under which circumstances can a business loss under section 35AD be set off against the profits of another specified business which is not eligible for deduction under section 35AD?

<p>The other business must be a hotel with at least 100 beds or a two-star hotel or above. (C)</p> Signup and view all the answers

What is the maximum period for which a speculative business loss can be carried forward?

<p>4 assessment years</p> Signup and view all the answers

Which of the following companies are NOT considered to be carrying on a speculation business for the purpose of section 73?

<p>A company whose gross total income consists of mainly income chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains', and 'Income from other sources'. (B), A company whose principal business is the business of trading in equities or the business of banking or the granting of loans and advances. (D)</p> Signup and view all the answers

Which of the following statements accurately reflects the situation of unabsorbed depreciation under the default tax regime?

<p>Unabsorbed depreciation can be carried forward for an indefinite period. (D)</p> Signup and view all the answers

A loss from owning and maintaining race horses can be set off against profits or income from a speculative business.

<p>False (B)</p> Signup and view all the answers

The loss in a specified business can be carried forward for a maximum period of 4 assessment years.

<p>False (B)</p> Signup and view all the answers

The loss brought forward from a specified business can be set off against any other income.

<p>False (B)</p> Signup and view all the answers

What is the maximum period for which a long-term capital loss can be carried forward?

<p>8 assessment years (A)</p> Signup and view all the answers

Match the following types of losses with their maximum carry forward periods:

<p>Loss from speculative business = 4 assessment years Loss from specified business = Indefinite period Loss from owning and maintaining race horses = 4 assessment years Long-term capital loss = 8 assessment years Short-term capital loss = 8 assessment years Unabsorbed depreciation = Indefinite period Unabsorbed business loss = 8 assessment years Unabsorbed loss from house property = 8 assessment years</p> Signup and view all the answers

Under which circumstances is the loss from house property allowed to be set-off against income from other heads when computing total income under the default tax regime?

<p>When the assessee has exercised the option to shift out of the default tax regime. (C)</p> Signup and view all the answers

Losses from gambling, betting, card games, etc. can be carried forward for a maximum period of 4 assessment years?

<p>False (B)</p> Signup and view all the answers

Losses from speculative business can be set off against income from other types of businesses, such as non-speculative businesses.

<p>False (B)</p> Signup and view all the answers

What section covers the carry forward and set-off of losses arising from a business or profession?

<p>Section 72</p> Signup and view all the answers

Losses from owning and maintaining race horses can be set off against income from any other source.

<p>False (B)</p> Signup and view all the answers

The loss from a specified business under Section 35AD can be carried forward for a maximum period of 4 assessment years?

<p>False (B)</p> Signup and view all the answers

The maximum period for carrying forward a long-term capital loss is 8 assessment years?

<p>True (A)</p> Signup and view all the answers

Flashcards

Inter-source adjustments

Adjustments made between different sources of income.

Inter-head adjustments

Adjustments made between different heads of income (e.g., business income vs. capital gains).

Set-off of losses

Subtracting losses from profits to determine the net income.

Carry-forward of losses

Transferring losses to future years to offset profits.

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Unabsorbed business loss

Business loss not completely used to offset profits in the current year.

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Maximum carry-forward period (business loss)

8 assessment years (AYs).

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Maximum carry-forward period (speculation loss)

4 assessment years (AYs).

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Long-term capital loss carry-forward period

8 assessment years (AYs).

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Set-off restrictions

Rules limiting the types of losses that can be set off against different income sources.

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Speculation business loss

Loss from activities like buying and selling stocks.

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Profits and gains of business or profession

Earnings from running a business or profession.

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Income under the head "Salaries"

Earnings from employment.

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Long-term capital gains

Profits from long-term investments.

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Racehorses ownership loss

Loss from owning and maintaining racehorses.

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Loss from activity of owning and maintaining racehorses

Losses incurred while owning and maintaining racehorses for competition.

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Study Notes

Carry Forward and Set-Off of Losses

  • Conditions for Carry Forward and Set-Off:

    • The loss must arise from a business or profession.
    • The loss must be incurred in an assessment year.
    • The loss must be carried forward to an assessment year in which income from the same business or profession is earned.

  • Maximum Carry Forward Period:

    • Business Loss: 8 assessment years immediately succeeding the assessment year in which the loss was incurred.
    • Speculative Business Loss: 4 assessment years.
    • Long-Term Capital Loss: 8 assessment years.

Set-Off of Losses

  • Set-Off under the Same Head of Income:

    • Losses can be set off against income under the same head.
    • For example, a loss from business can be set off against income from business, and a loss from capital gains can be set off against capital gains income.

  • Set-Off of Losses from Different Heads of Income:

    • Losses from certain types of business activities can be set off against income from other sources.
    • For example:
      • Loss from owning and maintaining race horses can be set off against profits or income from a speculative business or income from any other source.

Specific Types of Losses and Their Carry Forward Periods

  • Business Loss under Section 35AD:

    • Can be carried forward for a maximum period of 4 assessment years.
    • The loss from a business eligible for deduction under Section 35AD can be set off against the profits of another specified business which is not eligible for deduction under Section 35AD.

  • Loss from Owning and Maintaining Race Horses:

    • Can be carried forward for a maximum period of 8 assessment years.

  • Loss from a Specified Business:

    • Can be carried forward for a maximum period of 4 assessment years.

  • Loss from a Speculative Business:

    • Can be carried forward for a maximum period of 4 assessment years.

  • Loss from Gambling, Betting, and Card Games:

    • Can be carried forward for a maximum period of 4 assessment years.

  • Long-Term Capital Loss:

    • Can be carried forward for a maximum period of 8 assessment years.

Section 115BAC and the Default Tax Regime

  • Losses Not Allowed to Be Set Off Against Income from Other Heads under Section 115BAC:
    • Losses under the head "Income from other sources" (except winnings from lotteries, crossword puzzles, races, etc.) are NOT allowed to be set off against income from other heads under the default tax regime.

Other Relevant Points

  • Unabsorbed Depreciation Under the Default Tax Regime:

    • Unabsorbed depreciation in the case of a specified business under Section 35AD can be carried forward for a maximum period of 4 assessment years and can be set off against the income of the specified business, not against income from any other head.

  • Loss from Exempt Source:

    • A loss from an exempt source cannot be set off against income from a taxable source.

  • Order of Set-Off:

    • The order in which losses can be set off is not explicitly defined in India's Income Tax Act.
    • However, general principles suggest that losses should be set off against income in the order of their origin, starting with the most recent loss.
    • Losses from the same category of income (e.g., business losses) should generally be set off before losses from other categories.

Important Section of the Income Tax Act

  • Section 73: Covers the carry forward and set-off of losses arising from a business or profession.

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