Aggregation of Income, Set-Off and Carry Forward of Losses PDF

5 5.1 CHAPTER AGGREGATION OF INCOME, SET-OFF AND CARRY FORWARD OF LOSSES LEARNING OUTCOMES After studying this chapter, you would be able to – ♦...

5 5.1 CHAPTER AGGREGATION OF INCOME, SET-OFF AND CARRY FORWARD OF LOSSES LEARNING OUTCOMES After studying this chapter, you would be able to – ♦ identify the permissible inter-source and inter-head adjustments; ♦ identify the restrictions to inter-source and inter-head set-off of losses; ♦ comprehend the conditions to be satisfied for carry forward and set- off of losses under different heads; ♦ state the maximum period for which different losses can be carried forward; ♦ comprehend and arrange the order of set-off of losses; ♦ apply the above provisions to arrive at the total income of an assessee. © The Institute of Chartered Accountants of India  CHAPTER OVERVIEW Set off and Carry forward & Set off of losses under default tax regime under section 115BAC 5.2 Carry forward and Set-off of unabsorbed losses Inter-source set-off of losses under the same head of income Inter-head adjustment Unabsorbed loss from house property can be carried forward for maximum 8 AYs for set-off against income Exceptions from house property Exceptions Unabsorbed business loss can be carried forward for maximum 8 AYs for set-off against profits and gains from Loss under the head business or profession Speculation loss and loss © The Institute of Chartered Accountants of India Loss from Long term capital “Profits and gains of from the activity of owning speculative business loss business or profession” and maintaining race Unabsorbed loss from speculation business can be cannot be set off horses cannot be set-off carried forward for maximum 4 AYs for set-off against against income under against income under any income from speculation business the head “Salaries” INCOME TAX LAW other head Long-term capital loss can be carried forward for Loss from house maximum 8 AYs for set-off against long-term capital gains Loss under the head property cannot be Loss from the activity of owning and “Capital gains” cannot maintaining race horses set off against Short-term capital loss can be carried forward for be set-off against maximum 8 AYs for set-off against capital gains income under any income under any other head other head. Unabsorbed loss from the activity of owning and Note - maintaining race horses can be carried forward for Following brought forward losses/ depreciation is not allowed to be set off while computing total income maximum 4 AYs for set-off against income from the under default tax regime under section 115BAC activity of owning and maintaining race horses 1. Brought forward loss from self-occupied house property 2. Brought forward business loss of specified business u/s 35AD 3. Brought forward business loss on account of deduction u/s 35(1)(ii)/(iia)/(iii) or u/s 35(2AA) 4. Unabsorbed depreciation attributable to additional depreciation u/s 32(1)(iia).  Set off and Carry forward & Set off of losses under normal provisions of the Act Carry forward and Set-off of unabsorbed losses Inter-source set-off of losses under the same head of income Inter-head adjustment Unabsorbed loss from house property can be carried forward for maximum 8 AYs for set-off against income Exceptions Exceptions from house property Unabsorbed business loss can be carried forward for maximum 8 AYs for set-off against profits and gains from Loss under the head business or profession Speculation loss, loss from Loss from Long term capital “Profits and gains of specified business u/s speculative business loss business or profession” Unabsorbed loss from speculation business can be 35AD and loss from the cannot be set off carried forward for maximum 4 AYs for set-off against activity of owning and against income under income from speculation business maintaining race horses the head “Salaries” Loss from specified business u/s cannot be set-off against Unabsorbed loss from specified business under section income under any other © The Institute of Chartered Accountants of India 35AD can be carried forward for indefinite period for set- 35AD head off against profit from any specified business Loss from the activity of owning and Long-term capital loss can be carried forward for maintaining race horses maximum 8 AYs for set-off against long-term capital gains Loss from house Short-term capital loss can be carried forward for AGGREGATION OF INCOME, SET-OFF AND CARRY FORWARD OF LOSSES Loss under the head “Capital property can be set off maximum 8 AYs for set-off against capital gains gains” cannot be set-off against against income under income under any other head. any other head only to Unabsorbed loss from the activity of owning and the extent of maintaining race horses can be carried forward for maximum 4 AYs for set-off against income from the ` 2 lakhs activity of owning and maintaining race horses 5.3  5.4 INCOME TAX LAW 1. AGGREGATION OF INCOME In certain cases, some amounts are deemed as income in the hands of the assessee though they are actually not in the nature of income. These cases are contained in sections 68, 69, 69A, 69B, 69C and 69D. These are discussed in detail in Chapter 1. The Assessing Officer may require the assessee to furnish explanation in such cases. If the assessee does not offer any explanation or the explanation offered by the assessee is not satisfactory, the amounts referred to in these sections would be deemed to be the income of the assessee. Such amounts have to be aggregated with the assessee’s income. 2. CONCEPT OF SET-OFF AND CARRY FORWARD OF LOSSES 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/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. 3. INTER SOURCE ADJUSTMENT [SECTION 70] (i) Inter-source set-off of losses: Under this section, 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 : Loss from one house property can be set off against the income from another house property. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.5 FORWARD OF LOSSES Example : 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. (ii) Impermissible inter-source set-off: Inter-source set-off, however, is not permissible in the following cases - (a) Long-term capital loss [Section 70(3)] Short-term capital loss is allowed to be set off against both short-term capital gain and long-term capital gain. However, long-term capital loss can be set-off only against long-term capital gain and not against short- term capital gain. (b) Speculation loss [Section 73(1)] A loss in speculation business can be set-off only against the profits of any other speculation business and not against any other business or professional income. However, losses from other business can be adjusted against profits from speculation business. (c) Loss from the activity of owning and maintaining race horses [Section 74A(3)] Such loss can be set-off only against income from the activity of owning and maintaining race horses. (d) Losses from Specified business [Section 73A(1)] In case of an assessee exercising the option of shifting out of the default tax regime provided under section 115BAC(1A), loss in any specified business referred in section 35AD can be set-off only against any other specified business. However, losses from other business can be set-off against profits from specified business. Loss from an exempt source cannot be set-off against income from a taxable source of income. © The Institute of Chartered Accountants of India  5.6 INCOME TAX LAW 4. INTER HEAD ADJUSTMENT [SECTION 71] Loss under one head of income can be adjusted or set off against income under another head. However, the following points should be considered: (i) Loss under any head other than capital gains: Where the net result of the computation under any head of income (other than “Capital Gains”) is a loss, the assessee can set-off such loss against his income assessable for that assessment year under any other head, including “Capital Gains”. (ii) Loss under the head “Profits and gains from business or profession”: Where the net result of the computation under the head “Profits and gains of business or profession” is a loss, such loss cannot be set off against income under the head “Salaries”. It shall be allowed to set off from income under any other head except “Salaries”. (iii) Loss under the head “Capital Gains”: Where the net result of computation under the head ‘Capital Gains’ is a loss, whether short term or long term, such capital loss cannot be set-off against income under any other head. (iv) Loss under the head “Income from house property”: The loss under the head “Income from house property” would not be allowable to be set-off against income under the other head if the assessee pays tax at concessional rate u/s 115BAC. However, if the assessee exercises the option of shifting out of the default tax regime provided under section 115BAC(1A) and there is a loss under the head “Income from house property” and the assessee has income assessable under any other head of income, the maximum loss from house property which can be set-off against income from any other head is ` 2 lakhs. In other words, in such case, the amount of such loss exceeding ` 2 lakhs would not be allowable to be set-off against income under the other head. (v) Speculation loss and loss from the activity of owning and maintaining race horses cannot be set off against income under any other head. (vi) Losses from Specified business u/s 35AD: In case of an assessee exercising the option of shifting out of the default tax regime provided under section 115BAC(1A), loss from specified business referred to in section 35AD can be set off only against income from any other specified business. Such loss cannot be set off against income under any other head. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.7 FORWARD OF LOSSES If the income from a source is exempt from tax, loss from that exempt source cannot be set off against taxable income from a different source or taxable income under a different head. 5. CARRY FORWARD & SET-OFF OF LOSS FROM HOUSE PROPERTY [SECTION 71B] (i) Set-off and Carry Forward & Set-off of losses (a) If the assessee exercises the option of shifting out of the default tax regime provided under section 115BAC(1A): In any assessment year, if there is a loss under the head “Income from house property”, such loss will first be set-off against income from any other head to the extent of ` 2,00,000 during the same year. The unabsorbed loss will be carried forward to the following assessment year to be set-off against income under the head “Income from house property”. (b) If the assessee pays tax at concessional rate u/s 115BAC: The loss under the head “Income from house property” would not be allowable to be set-off against income under any other head. The unabsorbed loss will be carried forward to the following assessment year to be set-off against income under the head “Income from house property”. (ii) Maximum period for carry forward & set-off of losses: The loss under the head “Income from house property” is allowed to be carried forward upto 8 assessment years immediately succeeding the assessment year in which the loss was first computed. Once a particular loss is carried forward, it can be set off only against the income from the same head in the forthcoming assessment years. ILLUSTRATION 1 Mr. A, aged 35 years, submits the following particulars pertaining to the A.Y.2024-25: Particulars ` Income from salary (computed) 4,00,000 Loss from let-out property (-) 2,20,000 © The Institute of Chartered Accountants of India  5.8 INCOME TAX LAW Business loss (-)1,00,000 Bank interest (FD) received 80,000 Compute the total income of Mr. A for the A.Y.2024-25, assuming that (i) He has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). (ii) He pays tax under the default tax regime. SOLUTION (i) Computation of total income of Mr. A for the A.Y.2024-25 under normal provisions of the Act Particulars Amount Amount (`) (`) Income from salary 4,00,000 Less: Loss from house property of ` 2,20,000 to be restricted to ` 2 lakhs by virtue of section 71(3A) (-) 2,00,000 2,00,000 Balance loss of ` 20,000 from house property to be carried forward to next assessment year Income from other sources (interest on fixed 80,000 deposit with bank) Less: Business loss of ` 1,00,000 set-off to the extent of ` 80,000 (-) 80,000 - Business loss of ` 20,000 to be carried forward for set-off against business income of the next assessment year Gross total income [See Note below] 2,00,000 Less: Deduction under Chapter VI-A Nil Total income 2,00,000 © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.9 FORWARD OF LOSSES Notes: (i) Gross Total Income includes salary income of ` 2,00,000 after adjusting loss of ` 2,00,000 from house property. The balance loss of ` 20,000 from house property to be carried forward to next assessment year for set-off against income from house property of that year. (ii) Business loss of ` 1,00,000 is set off against bank interest of ` 80,000 and remaining business loss of ` 20,000 will be carried forward as it cannot be set off against salary income. (ii) Computation of total income of Mr. A for the A.Y.2024-25 under default tax regime Particulars Amount Amount (`) (`) Income from salary 4,00,000 Income from other sources (interest on fixed 80,000 deposit with bank) Less: Business loss of ` 1,00,000 set-off to the extent of ` 80,000 (-) 80,000 - Business loss of ` 20,000 to be carried forward for set-off against business income of the next assessment year Gross total income/ Total Income 4,00,000 Notes: (i) Under the default tax regime, loss from house property cannot be set off against income under any other head. Therefore, the loss of ` 2,20,000 from house property to be carried forward to next assessment year for set-off against income from house property of that year. (ii) Business loss of ` 1,00,000 is set off against bank interest of ` 80,000 and remaining business loss of ` 20,000 will be carried forward as it cannot be set off against salary income. © The Institute of Chartered Accountants of India  5.10 INCOME TAX LAW 6. CARRY FORWARD AND SET-OFF OF BUSINESS LOSSES [SECTIONS 72] Under the Act, the assessee has the right to carry forward the loss from business and profession in cases where such loss cannot be set-off due to the absence or inadequacy of income under any other head in the same year. The loss so carried forward can be set-off against the profits of subsequent previous years. Section 72 covers the carry forward and set-off of losses arising from a business or profession. Conditions The assessee’s right to carry forward business losses under this section is, however, subject to the following conditions: (i) The loss should have been incurred in business, profession or vocation. (ii) The loss should not be in the nature of a loss in the business of speculation. (iii) Loss from one business can be carried forward & set-off against the income from any other business: The loss may be carried forward and set- off against the income from business or profession though not necessarily against the profits and gains of the same business or profession in which the loss was incurred. However, a loss carried forward cannot, under any circumstances, be set-off against the income from any head other than “Profits and gains of business or profession”. (iv) Person who incurred the loss alone is entitled to carry forward & set-off the loss: The loss can be carried forward and set off only against the profits of the assessee who incurred the loss. That is, only the person who has incurred the loss is entitled to carry forward & set off the same. Consequently, the successor of a business cannot carry forward & set off the losses of his predecessor except in the case of succession by inheritance. (v) Maximum period for carry forward & set-off of losses: A business loss can be carried forward for a maximum period of 8 assessment years immediately succeeding the assessment year in which the loss was incurred. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.11 FORWARD OF LOSSES ILLUSTRATION 2 Mr. B, a resident individual, furnishes the following particulars for the P.Y.2023-24: Particulars ` Income from salary (computed) 45,000 Income from house property (24,000) Income from non-speculative business (22,000) Income from speculative business (4,000) Short-term capital losses (25,000) Long-term capital gains taxable u/s 112 19,000 What is the total income chargeable to tax for the A.Y.2024-25, assuming that he pays tax under section 115BAC? SOLUTION Total income of Mr. B for the A.Y. 2024-25 Particulars Amount Amount (`) (`) Income from salaries 45,000 Income from house property Loss from house property to be carried forward [Note (i)] (24,000) Profits and gains of business and profession Business loss to be carried forward [Note (ii)] (22,000) Speculative loss to be carried forward [Note (iii)] (4,000) Capital Gains Long term capital gain taxable u/s 112 19,000 Short term capital loss ` 25,000 set off against long-term capital gains to the extent of ` 19,000 [Note (iv)] (19,000) Nil Balance short term capital loss of ` 6,000 to be carried forward [Note (iv)] Taxable income 45,000 © The Institute of Chartered Accountants of India  5.12 INCOME TAX LAW Notes: (i) Since Mr. B is paying tax under the default tax regime u/s 115BAC, loss from house property cannot be set off against income under any other head. Hence, such loss has to be carried forward to the next year for set-off against income from house property, if any. (ii) Business loss cannot be set-off against salary income. Therefore, loss of ` 22,000 from the non-speculative business cannot be set off against the income from salaries. Hence, such loss has to be carried forward to the next year for set-off against business profits, if any. (iii) Loss of ` 4,000 from the speculative business can be set off only against the income from the speculative business. Hence, such loss has to be carried forward. (iv) Short term capital loss can be set off against both short term capital gain and long-term capital gain. Therefore, short term capital loss of ` 25,000 can be set-off against long-term capital gains to the extent of ` 19,000. The balance short term capital loss of ` 6,000 cannot be set-off against any other income and has to be carried forward to the next year for set-off against capital gains, if any. 7. LOSSES IN SPECULATION BUSINESS [SECTION 73] The meaning of the expression ‘speculative transaction’ as defined in section 43(5) and the treatment of income from speculation business has already been discussed under the head “Profits and gains of business or profession”. (i) Set-off and carry forward & set-off of loss from speculation business: Since speculation is deemed to be a business distinct and separate from any other business carried on by the assessee, the losses incurred in speculation business can neither be set off in the same year against any other non- speculation income nor be carried forward and set off against other income in the subsequent years. Therefore, if the losses sustained by an assessee in a speculation business cannot be set-off in the same year against any other speculation profit, they can be carried forward to subsequent years and set-off only against income from any speculation business carried on by the assessee. Loss from the © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.13 FORWARD OF LOSSES activity of trading in derivatives, however, is not to be treated as speculative loss. (ii) Maximum period for carry forward & set-off of losses: The loss in speculation business can be carried forward only for a maximum period of 4 years from the end of the relevant assessment year in respect of which the loss was computed. (iii) When a business of a company deemed to be carrying on a speculation business: The Explanation to this section provides that where any part of the business of a company consists in the purchase and sale of the shares of other companies, such company shall be deemed to be carrying on speculation business to the extent to which the business consists of the purchase and sale of such shares. However, this deeming provision does not apply to the following companies – (1) 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”; (2) A company, the principal business of which is – (i) the business of trading in shares; or (ii) the business of banking; or (iii) the granting of loans and advances. Thus, these companies would be exempted from the operation of this Explanation. Accordingly, if these companies carry on the business of purchase and sale of shares of other companies, they would not be deemed to be carrying on speculation business. 8. CARRY FORWARD & SET OFF OF LOSSES OF SPECIFIED BUSINESSES [SECTION 73A] (i) Set-off and Carry forward & set-off of losses of specified business: An assessee exercising the option of shifting out of the default tax regime provided under section 115BAC(1A) and carrying on specified business, can claim deduction u/s 35AD in respect of capital expenditure (other than land, © The Institute of Chartered Accountants of India  5.14 INCOME TAX LAW goodwill and financial instruments) incurred in respect of such business, subject to fulfillment of specified conditions. Any loss computed in respect of the specified business referred to in section 35AD can, however, be set off only against profits and gains, if any, of any other specified business. The unabsorbed loss, if any, will be carried forward for set off against profits and gains of any specified business in the following assessment year and so on. (ii) Loss can be set-off indefinitely: There is no time limit specified for carry forward and set-off and therefore, such loss can be carried forward indefinitely for set-off against income from specified business. Under the optional tax regime, the loss of an assessee claiming deduction under section 35AD in respect of a specified business can be set-off against the profit of another specified business under section 73A, irrespective of whether the latter is eligible for deduction under section 35AD. An assessee can, therefore, set-off the losses of a hospital or hotel which begins to operate after 1st April, 2010 and which is eligible for deduction under section 35AD, against the profits of the existing business of operating a hospital (with atleast 100 beds for patients) or a hotel (of two-star or above category), even if the latter is not eligible for deduction under section 35AD. 9. LOSSES UNDER THE HEAD ‘CAPITAL GAINS’ [SECTION 74] Carry forward & set-off of losses: Section 74 provides that where, for any assessment year, the net result under the head ‘Capital gains’ is short term capital loss or long term capital loss, the loss shall be carried forward to the following assessment year to be set off in the following manner: (i) Short-term capital loss: Where the loss so carried forward is a short-term capital loss, it shall be set off against any capital gains, short term or long term, arising in that year. (ii) Long-term capital loss: Where the loss so carried forward is a long-term capital loss, it shall be set off only against long term capital gain arising in that year. (iii) Loss under head capital gains: Net loss under the head capital gains cannot be set off against income under any other head. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.15 FORWARD OF LOSSES (iv) Maximum period for carry forward & set-off of loss: Any unabsorbed loss shall be carried forward to the following assessment year up to a maximum of 8 assessment years immediately succeeding the assessment year for which the loss was first computed. Long-term capital gain exceeding ` 1,00,000 arising on sale of equity shares or units of equity oriented fund or unit of business trust on which STT is paid - in respect of equity shares, both at the time of acquisition and sale and - in respect of units of equity oriented fund or unit of business trust, at the time of sale is taxable under section 112A@10%. Long-term capital loss on sale of such shares/units can, therefore, be set-off and carried forward for set-off against long- term capital gains by virtue of section 70(3) and section 74. ILLUSTRATION 3 During the P.Y. 2023-24, Mr. C has the following income and the brought forward losses: Particulars ` Short term capital gains on sale of shares 1,50,000 Long term capital loss of A.Y.2022-23 (96,000) Short term capital loss of A.Y.2023-24 (37,000) Long term capital gain u/s 112 75,000 What is the capital gain taxable in the hands of Mr. C for the A.Y.2024-25? SOLUTION Taxable capital gains of Mr. C for the A.Y. 2024-25 Particulars ` ` Short term capital gains on sale of shares 1,50,000 Less: Brought forward short-term capital loss of the A.Y.2023-24 (37,000) 1,13,000 Long term capital gain 75,000 Less: Brought forward long-term capital loss of A.Y.2022-23 ` 96,000 set off to the extent of ` 75,000 (75,000) Nil [See Note below] Taxable short-term capital gains 1,13,000 © The Institute of Chartered Accountants of India  5.16 INCOME TAX LAW Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the unadjusted long-term capital loss of A.Y.2022-23 of ` 21,000 (i.e. ` 96,000 – ` 75,000) can be carried forward to the next year to be set-off against long-term capital gains of that year. 10. LOSSES FROM THE ACTIVITY OF OWNING AND MAINTAINING RACE HORSES [SECTION 74A(3)] (i) Set-off and Carry forward & set-off of loss: According to the provisions of section 74A(3), the losses incurred by an assessee from the activity of owning and maintaining race horses cannot be set-off against the income from any other source other than the activity of owning and maintaining race horses. (ii) Maximum period for carry forward & set-off of losses: Such loss can be carried forward for a maximum period of 4 assessment years for being set- off against the income from the activity of owning and maintaining race horses in the subsequent years. (iii) Meaning of certain terms: Term Meaning Amount of loss (i) In case assessee has no income by way of stake incurred by the money – Amount of revenue expenditure incurred assessee in the by the assessee wholly & exclusively for the purpose activity of of maintaining race horses. owning and (ii) In case assessee has income by way of stake maintaining money - The amount by which such income by way racehorses of stake money falls short of the amount of revenue expenditure incurred by the assessee wholly & exclusively for the purpose of maintaining race horses. i.e., Loss = Stake money – revenue expenditure for the purpose of maintaining race horses. Horse race A horse race upon which wagering or betting maybe lawfully made. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.17 FORWARD OF LOSSES Income by way of The gross amount of prize money received on a race stake money horse or race horses by the owner thereof on account of the horse or horses or anyone or more of the horses winning or being placed second or in any lower position in horse races. ILLUSTRATION 4 Mr. D has the following income for the P.Y.2023-24: Particulars ` Income from the activity of owning and maintaining the race horses 75,000 Income from textile business 85,000 Brought forward textile business loss (relating to A.Y. 2023-24) 50,000 Brought forward loss from the activity of owning and maintaining the 96,000 race horses (relating to A.Y.2021-22) What is the total income in the hands of Mr. D for the A.Y. 2024-25? SOLUTION Total income of Mr. D for the A.Y. 2024-25 Particulars ` ` Income from the activity of owning and maintaining race 75,000 horses Less: Brought forward loss of ` 96,000 from the activity of owning and maintaining race horses set-off to the extent of ` 75,000 75,000 Nil Balance loss of ` 21,000 (` 96,000 – ` 75,000) from the activity of owning and maintaining race horses to be carried forward to A.Y.2025-26 Income from textile business 85,000 Less: Brought forward business loss from textile business 50,000 35,000 Total income 35,000 Note: Loss from the activity of owning and maintaining race horses cannot be set- off against any other source/head of income. © The Institute of Chartered Accountants of India  5.18 INCOME TAX LAW 11. ORDER OF SET-OFF OF LOSSES As per the provisions of section 72(2), brought forward business loss is to be set- off before setting off unabsorbed depreciation. Therefore, the order in which set- off will be effected is as follows - (a) Current year depreciation [Section 32(1)]; (b) Current year capital expenditure on scientific research and current year expenditure on family planning, to the extent allowed. (c) Brought forward loss from business/profession [Section 72(1)]; (d) Unabsorbed depreciation [Section 32(2)]; (e) Unabsorbed capital expenditure on scientific research [Section 35(4)]; (f) Unabsorbed expenditure on family planning [Section 36(1)(ix)]. ILLUSTRATION 5 Mr. E has furnished his details for the A.Y.2024-25 as under: Particulars ` Income from salaries (computed) 1,50,000 Income from speculation business 60,000 Loss from non-speculation business (40,000) Short term capital gain 80,000 Long term capital loss of A.Y.2022-23 (30,000) Winning from lotteries (Gross) 20,000 Compute the total income of Mr. E for the A.Y.2024-25. SOLUTION Computation of total income of Mr. E for the A.Y.2024-25 Particulars ` ` Income from salaries 1,50,000 Income from speculation business 60,000 Less : Loss from non-speculation business (40,000) 20,000 © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.19 FORWARD OF LOSSES Short-term capital gain 80,000 Winnings from lotteries 20,000 Taxable income 2,70,000 Note: Long term capital loss can be set off only against long term capital gain. Therefore, long term capital loss of ` 30,000 has to be carried forward to the next assessment year. 12. SUBMISSION OF RETURN OF LOSSES [SECTION 80] As per section 80, - business loss under section 72(1), - speculation business loss under section 73(2), - loss from specified business under section 73A(2), in case the assessee exercises the option of shifting out of the default tax regime provided under section 115BAC(1A), - loss under the head “Capital Gains” under section 74(1) and - loss from activity of owning and maintaining race horses under section 74A(3), which has not been determined in pursuance of a return filed under section 139(3) can not be carried forward and set-off. Thus, the assessee must have filed a return of loss under section 139(3) in order to carry forward and set off of such losses. Such a return of loss should be filed within the time allowed under section 139(1). This condition does not apply to a loss from house property carried forward under section 71B and unabsorbed depreciation carried forward under section 32(2). © The Institute of Chartered Accountants of India  5.20 INCOME TAX LAW LET US RECAPITULATE Inter-source and Inter-head set-off of losses [Sections 70 & 71] Section Provision Exceptions 70 Inter-source set-off of (i) Loss from speculation business losses under the same head can be set-off only against of income profits from another speculation Any loss in respect of one business. source shall be set-off (ii) Long term capital loss (LTCL) can against income from any be set-off only against Long term other source under the same capital gains (LTCG). head of income. For example, (iii) Loss from the activity of owning - loss from textile business and maintaining race horses can can be set-off against profit be set-off only against income from printing business. from the activity of owning and - loss from one house maintaining race horses. property can be set-off against income from another (iv) An assessee carrying on specified house property. business u/s 35AD and exercising the option of shifting out of the - short-term capital loss default tax regime provided under (STCL) can be set-off against section 115BAC(1A), would be both STCG and LTCG. eligible for deduction u/s 35AD. In such a case, loss from specified business under section 35AD can be set-off only against profits from any other specified business. 71 Inter head adjustment (i) Loss under the head “Profits and Loss under one head of gains of business or profession” income can be set-off against cannot be set off against income income assessable under any under the head “Salaries” other head of income. (ii) Loss under the head “Capital gains” cannot be set-off against income under any other head. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.21 FORWARD OF LOSSES For example, business loss (iii) Speculation loss and loss from can be set-off against income the activity of owning and from house property. maintaining race horses cannot be set-off against income under any other head. (iv) In case of an assessee exercising the option of shifting out of the default tax regime provided under section 115BAC(1A) and claiming deduction u/s 35AD, loss from specified business u/s 35AD cannot be set off against income under any other head. (v) The loss under the head “Income from house property” would not be allowable to be set-off against income under the other head if the assessee pays tax at concessional rate u/s 115BAC. However, if the assessee exercises the option of shifting out of the default tax regime provided under section 115BAC(1A), loss from house property can be set-off against income under any other head only to the extent of ` 2 lakhs. The remaining loss can be carried forward for set-off against income from house property of the succeeding year(s). Losses which cannot be set-off or carried forward Loss from gambling, betting, card games etc. Loss from an exempt source [for example, share of loss of partnership firm cannot be set-off against any other business income] © The Institute of Chartered Accountants of India  5.22 INCOME TAX LAW Maximum period of carry forward of losses & Manner of set-off of brought forward losses Section Nature of loss to be Income against which Maximum period carried forward the brought forward [from the end of loss can be set-off the relevant assessment year] for carry forward of losses 32(2) Unabsorbed Income under any head Indefinite period depreciation other than salaries 71B Unabsorbed loss from Income from house 8 assessment years house property property 72 Unabsorbed business Profits and gains from 8 assessment years loss business or profession 73 Loss from speculation Income from any 4 assessment years business speculation business 73A Loss from specified Profit from any Indefinite period business u/s 35AD, in specified business, case of an assessee irrespective of whether exercising the option of such business is eligible shifting out of the for deduction u/s default tax regime 35AD. provided under section 115BAC(1A) 74 Long-term capital loss Long-term capital gains 8 assessment years Short-term capital loss Short-term/Long-term 8 assessment years capital gains 74A Loss from the activity Income from the 4 assessment years of owning and activity of owning and maintaining race maintaining race horses horses. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.23 FORWARD OF LOSSES Order of set-off of losses 1. Current year depreciation / Current year capital expenditure on scientific research and current year expenditure on family planning, to the extent allowed. 2. Brought forward loss from business/profession [Section 72(1)] 3. Unabsorbed depreciation [Section 32(2)] 4. Unabsorbed capital expenditure on scientific research [Section 35(4)]. 5. Unabsorbed expenditure on family planning [Section 36(1)(ix)] Note - As per section 80, filing of loss return under section 139(3) within the due date specified under section 139(1) is mandatory for carry forward of the above losses except loss from house property and unabsorbed depreciation. © The Institute of Chartered Accountants of India  5.24 INCOME TAX LAW TEST YOUR KNOWLEDGE 1. Compute the gross total income of Mr. F for the A.Y. 2024-25 from the information given below – Particulars ` Income from house property (computed) 1,25,000 Income from business (before providing for depreciation) 1,35,000 Short term capital gains on sale of unlisted shares 56,000 Long term capital loss from sale of property (brought forward (90,000) from A.Y. 2023-24) Income from tea business 1,20,000 Dividends from Indian companies carrying on agricultural 80,000 operations (Gross) Current year depreciation 26,000 Brought forward business loss (loss incurred six years ago) (45,000) 2. Mr. Soohan submits the following details of his income for the A.Y.2024-25: Particulars ` Income from salary (computed) 3,00,000 Loss from let out house property (-) 40,000 Income from sugar business 50,000 Loss from iron ore business for P.Y. 2018-19 (discontinued in (-) 1,20,000 P.Y. 2019-20) Short term capital loss (-) 60,000 Long term capital gain 40,000 Dividend 5,000 Income received from lottery winning (Gross) 50,000 Winnings from card games (Gross) 6,000 Agricultural income 20,000 Short-term capital loss under section 111A (-) 10,000 Bank interest on Fixed deposit 5,000 © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.25 FORWARD OF LOSSES Calculate gross total income and losses to be carried forward, assuming that he has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). 3. Mr. Batra furnishes the following details for year ended 31.03.2024: Particulars ` Short term capital gain 1,40,000 Loss from speculative business 60,000 Long term capital gain on sale of land 30,000 Long term capital loss on sale of unlisted shares 1,00,000 Income from business of textile (after allowing current year 50,000 depreciation) Income from activity of owning and maintaining race horses 15,000 Income from salary (computed) 1,00,000 Loss from house property 40,000 Following are the brought forward losses: (i) Losses from activity of owning and maintaining race horses-pertaining to A.Y.2021-22 - ` 25,000. (ii) Brought forward loss from business of textile ` 60,000 - Loss pertains to A.Y. 2016-17. Compute gross total income of Mr. Batra for the Assessment Year 2024-25, assuming that he has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). Also determine the losses eligible for carry forward to the A.Y. 2025-26. 4. Mr. A furnishes you the following information for the year ended 31.03.2024: (` ) (i) Income from plying of vehicles (computed as per books) (He 3,20,000 owned 5 light goods vehicle throughout the year) (ii) Income from retail trade of garments (Computed as per books) (Sales turnover ` 1,35,70,000) 7,50,000 Mr. A had declared income on presumptive basis under section 44AD for the first time in A.Y.2023-24. Assume © The Institute of Chartered Accountants of India  5.26 INCOME TAX LAW 10% of the turnover during the P.Y.2023-24 was received in cash and balance through A/c payee cheque and all the payments in respect of expenditure were also made through A/c payee cheque or debit card. (iii) He has brought forward depreciation relating to 1,00,000 A.Y. 2022-23 Compute taxable income of Mr. A and his tax liability for the A.Y. 2024-25 with reasons for your computation, assuming that he exercises the option of shifting out of the default tax regime provided under section 115BAC(1A). 5. Mr. Aditya furnishes the following details for the year ended 31-03-2024: Particulars Amount (`) Loss from speculative business A 25,000 Income from speculative business B 5,000 Loss from specified business covered under section 35AD 20,000 Income from salary (computed) 3,00,000 Loss from let out house property 2,50,000 Income from trading business 45,000 Long-term capital gain from sale of urban land 2,00,000 Long-term capital loss on sale of shares (STT not paid) 75,000 Long-term capital loss on sale of listed shares in recognized 1,02,000 stock exchange (STT paid at the time of acquisition and sale of shares) Following are the brought forward losses: (1) Losses from owning and maintaining of race horses pertaining to A.Y. 2022-23 ` 2,000. (2) Brought forward loss from trading business ` 5,000 relating to A.Y.2019- 20. Compute the total income of Mr. Aditya and show the items eligible for carry forward, assuming that he exercises the option of shifting out of the default tax regime provided under section 115BAC(1A). © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.27 FORWARD OF LOSSES 6. Mr. Garg, a resident individual, furnishes the following particulars of his income and other details for the P.Y. 2023-24. Particulars ` (1) Income from Salary (computed) 15,000 (2) Income from business 66,000 (3) Long term capital gain on sale of land 10,800 (4) Loss on maintenance of race horses 15,000 (5) Loss from gambling 9,100 The other details of unabsorbed depreciation and brought forward losses pertaining to A.Y. 2023-24 are as follows: Particulars ` (1) Unabsorbed depreciation 11,000 (2) Loss from Speculative business 22,000 (3) Short term capital loss 9,800 Compute the Gross total income of Mr. Garg for the A.Y. 2024-25 and the amount of loss, if any that can be carried forward or not. 7. The following are the details relating to Mr. Srivatsan, a resident Indian, aged 57, relating to the year ended 31.3.2024: Particulars ` Income from salaries (computed) 2,20,000 Loss from house property 1,90,000 Loss from cloth business 2,40,000 Income from speculation business 30,000 Loss from specified business covered by section 35AD 20,000 Long-term capital gains from sale of urban land 2,50,000 Loss from card games 32,000 Income from betting (Gross) 45,000 Life Insurance Premium paid (10% of the capital sum assured) 45,000 © The Institute of Chartered Accountants of India  5.28 INCOME TAX LAW Compute the total income and show the items eligible for carry forward, assuming that he has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). 8. Mr. Rajat submits the following information for the financial year ending 31st March, 2024. He decides to pay tax under the default tax regime u/s 115BAC. He desires that you should: (a) Compute the total income; and (b) Ascertain the amount of losses that can be carried forward. Particulars ` (i) He has two let out house property: (a) House No. I – Income after all statutory deductions 72,000 (b) House No. II – Current year loss (30,000) (ii) He has three proprietary businesses: (a) Textile Business: (i) Discontinued from 31st October, 2023 – Current 40,000 year loss (ii) Brought forward business loss of A.Y.2019-20 95,000 (b) Chemical Business: (i) Discontinued from 1st March, 2021 – hence no Nil profit/loss (ii) Bad debts allowed in earlier years recovered during 35,000 this year (iii) Brought forward business loss of A.Y. 2020-21 50,000 (c) Leather Business: Profit for the current year 1,00,000 (d) Share of profit in a firm in which he is partner since 16,550 2009 (iii) (a) Short-term capital gain 60,000 (b) Long-term capital loss 35,000 (iv) Contribution to LIC towards premium 10,000 9. Ms. Geeta, a resident individual, provides the following details of her income / losses for the year ended 31.3.2024: (i) Salary received as a partner from a partnership firm ` 7,50,000. The same was allowed to the firm. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.29 FORWARD OF LOSSES (ii) Loss on sale of shares listed in BSE ` 3,00,000. Shares were held for 15 months and STT paid on sale and acquisition. (iii) Long-term capital gain on sale of land ` 5,00,000. (iv) ` 51,000 received in cash from friends in party. (v) ` 55,000, being dividend income on listed equity shares of domestic companies. (vi) Brought forward business loss of A.Y. 2022-23 ` 12,50,000. Compute gross total income of Ms. Geeta for the A.Y. 2024-25 and ascertain the amount of loss that can be carried forward. 10. Mr. P, a resident individual, furnishes the following particulars of his income and other details for the previous year 2023-24: Sl. No. Particulars ` (i) Income from salary (computed) 18,000 (ii) Net annual value of house property 70,000 (iii) Income from business 80,000 (iv) Income from speculative business 12,000 (v) Long term capital gain on sale of land 15,800 (vi) Loss on maintenance of race horse 9,000 (vii) Loss on gambling 8,000 Depreciation allowable under the Income-tax Act, 1961, comes to ` 8,000, for which no treatment is given above. The other details of unabsorbed depreciation and brought forward losses (pertaining to A.Y. 2023-24) are: Sl. No. Particulars ` (i) Unabsorbed depreciation 9,000 (ii) Loss from speculative business 16,000 (iii) Short term capital loss 7,800 Compute the gross total income of Mr. P for the A.Y. 2024-25, and the amount of loss that can or cannot be carried forward. © The Institute of Chartered Accountants of India  5.30 INCOME TAX LAW ANSWERS 1. Gross Total Income of Mr. F for the A.Y. 2024-25 Particulars ` ` Income from house property (Computed) 1,25,000 Income from business Profits before depreciation 1,35,000 Less: Current year depreciation 26,000 Less: Brought forward business loss 45,000 64,000 Income from tea business (40% is business income) 48,000 1,12,000 Capital gains Short-term capital gains 56,000 Income from Other Sources Dividend income (taxable in the hands of shareholders) 80,000 Gross Total Income 3,73,000 Notes: (1) Dividend from Indian companies is taxable at normal rates of tax in the hands of resident shareholders. (2) 60% of the income from tea business is treated as agricultural income and therefore, exempt from tax; (3) Long-term capital loss can be set-off only against long-term capital gains. Therefore, long-term capital loss of ` 90,000 brought forward from A.Y.2023-24 cannot be set-off in the A.Y.2024-25, since there is no long-term capital gains in that year. It has to be carried forward for set- off against long-term capital gains, if any, during A.Y.2025-26. 2. Computation of Gross Total Income of Mr. Soohan for the A.Y.2024-25 Particulars ` ` Salaries Income from salary 3,00,000 © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.31 FORWARD OF LOSSES Less: Loss from house property set-off against salary income as per section 71 (40,000) 2,60,000 Profits and gains of business or profession Income from sugar business 50,000 Less: Brought forward loss of ` 1,20,000 from iron- ore business set-off as per section 72(1) to the (50,000) Nil extent of ` 50,000 Balance business loss of ` 70,000 of P.Y.2018-19 to be carried forward to A.Y.2025-26 Capital gains Long term capital gain 40,000 Less: Short term capital loss of ` 60,000 set-off to the extent of ` 40,000 (40,000) Nil Balance short-term capital loss of ` 20,000 to be carried forward Short-term capital loss of ` 10,000 u/s 111A also to be carried forward Income from other sources Dividend (fully taxable in the hands of shareholders) 5,000 Winnings from lottery 50,000 Winnings from card games 6,000 Bank FD interest 5,000 66,000 Gross Total Income 3,26,000 Losses to be carried forward to A.Y.2025-26 Loss of iron-ore business (` 1,20,000 – ` 50,000) 70,000 Short term capital loss (` 20,000 + ` 10,000) 30,000 Note: Agricultural income is exempt under section 10(1). © The Institute of Chartered Accountants of India  5.32 INCOME TAX LAW 3. Computation of Gross Total Income of Mr. Batra for the A.Y. 2024-25 Particulars ` ` Salaries 1,00,000 Less: Current year loss from house property (40,000) 60,000 [Since Mr. Batra has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A)] Profit and gains of business or profession Income from textile business 50,000 Less: Loss of ` 60,000 from textile business b/f from A.Y. 2016-17 set-off to the extent of ` 50,000 50,000 NIL Income from the activity of owning and 15,000 maintaining race horses Less: Loss of ` 25,000 from activity of owning and maintaining race horses b/f from A.Y. 2021-22 set- off to the extent of ` 15,000 15,000 NIL Balance loss of ` 10,000 to be carried forward to A.Y. 2025-26 [See Note 2] Capital Gain Short term capital gain 1,40,000 Long term capital gain on sale of land 30,000 Less: Long term capital loss of ` 1,00,000 on sale of unlisted shares set-off to the extent of ` 30,000 30,000 NIL Balance loss of ` 70,000 to be carried forward to A.Y. 2025-26 [See Note 3] Gross Total Income 2,00,000 © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.33 FORWARD OF LOSSES Losses to be carried forward to A.Y. 2025-26 Particulars ` Current year loss from speculative business [See Note-4] 60,000 Current year long term capital loss on sale of unlisted shares 70,000 Loss from activity of owning and maintaining of race horse 10,000 pertaining to A.Y.2021-22 Notes:- (1) As per section 72(3), business loss can be carried forward for a maximum of eight assessment years immediately succeeding the assessment year for which the loss was first computed. Since the eight year period for carry forward of business loss of A.Y. 2016-17 expired in the A.Y. 2024-25, the balance unabsorbed business loss of ` 10,000 cannot be carried forward to A.Y. 2025-26. (2) As per section 74A(3), the loss incurred on maintenance of race horses cannot be set-off against income from any source other than the activity of owning and maintaining race horses. Such loss can be carried forward for a maximum period of 4 assessment years. (3) Long-term capital loss on sale of unlisted shares can be set-off against long-term capital gain on sale of land. The balance loss of ` 70,000 cannot be set-off against short term capital gain or against any other head of income. The same has to be carried forward for set-off against long-term capital gain of the subsequent assessment year. Such long-term capital loss can be carried forward for a maximum of eight assessment years. (4) Loss from speculation business cannot be set-off against any income other than profit and gains of another speculation business. Such loss can, however, be carried forward for a maximum of four years as per section 73(4) to be set-off against income from speculation business. 4. Computation of total income and tax liability of Mr. A for the A.Y. 2024-25 Particulars ` Income from retail trade – as per books (See Note 1 below) 7,50,000 Income from plying of vehicles – as per books (See Note 2 below) 3,20,000 10,70,000 © The Institute of Chartered Accountants of India  5.34 INCOME TAX LAW Less : Set off of b/f depreciation relating to A.Y. 2022-23 1,00,000 Total income 9,70,000 Tax liability 1,06,500 Add: Health and Education cess@4% 4,260 Total tax liability 1,10,760 Note: 1. Income from retail trade: Presumptive business income under section 44AD is ` 8,41,340 i.e., 8% of ` 13,57,000, being 10% of the turnover received in cash and 6% of ` 1,22,13,000, being the amount of sales turnover received through A/c payee cheque. However, the income computed as per books is ` 7,50,000 which is to be further reduced by the amount of unabsorbed depreciation of ` 1,00,000. Since the income computed as per books is lower than the income deemed under section 44AD, the assessee can adopt the income as per books. However, if he does not declare profits as per presumptive taxation under section 44AD, he has to get his books of accounts audited under section 44AB, since his turnover exceeds ` 1 crore (the enhanced limit of ` 10 crore would not be available, since more than 5% of the turnover is received in cash). Also, his case would be falling under section 44AD(4) and hence, tax audit is mandatory. It may further be noted that he cannot declare income under presumptive provisions under section 44AD for next five assessment years, if he does not declared profits as per presumptive provisions under section 44AD this year. 2. Income from plying of light goods vehicles: Income calculated under section 44AE(1) would be ` 7,500 x 12 x 5 which is equal to ` 4,50,000. However, the income from plying of vehicles as per books is ` 3,20,000, which is lower than the presumptive income of ` 4,50,000 calculated as per section 44AE(1). Hence, the assessee can adopt the income as per books i.e. ` 3,20,000, provided he maintains books of account as per section 44AA and gets his accounts audited and furnishes an audit report as required under section 44AB. It is to be further noted that in both the above cases, if income is declared under presumptive provisions, all deductions under sections 30 to 38, including depreciation would have been deemed to have been given full effect to and no further deduction under those sections would be allowable. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.35 FORWARD OF LOSSES If income is declared as per presumptive provisions, his total income would be as under: Particulars ` Income from retail trade under section 44AD [` 13,57,000@ 8,41,340 8% plus ` 1,22,13,000 @6%] Income from plying of light goods vehicles under section 4,50,000 44AE [` 7,500 x 12 x 5] 12,91,340 Less: Set off of brought forward depreciation – not possible as it is deemed that it has been allowed and set off Nil Total income 12,91,340 Tax thereon 1,99,902 Add : Health and Education cess @4% 7,996 Total tax liability 2,07,898 Total tax liability (rounded off) 2,07,900 5. Computation of total income of Mr. Aditya for the A.Y.2024-25 Particulars ` ` Salaries Income from Salary 3,00,000 Less: Loss from house property set-off against salary income as per section 71(3A) 2,00,000 1,00,000 Loss from house property to the extent not set off i.e. ` 50,000 (` 2,50,000 – ` 2,00,000) to be carried forward to A.Y. 2025-26 Profits and gains of business or profession Income from trading business 45,000 Less: Brought forward loss from trading business of A.Y. 2019-20 can be set off against current year income from trading business as per section 72(1), since the eight year time limit as specified under section 72(3), within which set-off is permitted, has not expired. 5,000 40,000 © The Institute of Chartered Accountants of India  5.36 INCOME TAX LAW Income from speculative business B 5,000 Less: Loss of ` 25,000 from speculative business A set-off as per section 73(1) to the extent of ` 5,000 5,000 Nil Balance loss of ` 20,000 from speculative business A to be carried forward to A.Y.2025-26 as per section 73(2) Loss of ` 20,000 from specified business covered under section 35AD to be carried forward for set- off against income from specified business as per section 73A. Capital Gains Long term capital gain on sale of urban land 2,00,000 Less: Long term capital loss on sale of shares (STT not paid) set-off as per section 74(1)] 75,000 Less: Long-term capital loss on sale of listed shares on which STT is paid can also be set-off as per section 74(1), since long-term capital arising on sale of such shares is taxable under section 112A 1,02,000 23,000 Total Income 1,63,000 Items eligible for carried forward to A.Y.2025-26 Particulars ` Loss from House property 50,000 As per section 71(3A), loss from house property can be set-off against any other head of income to the extent of ` 2,00,000 since Mr. Aditya is exercising the option of shifting out of the default tax regime provided under section 115BAC(1A). As per section 71B, balance loss not set-off can be carried forward to the next year for set-off against income from house property of that year. It can be carried forward for a maximum of eight assessment years i.e., upto A.Y.2032-33, in this case. Loss from speculative business A 20,000 Loss from speculative business can be set-off only against profits from any other speculation business. As per section 73(2), balance loss not set-off can be carried forward to the next year for set-off © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.37 FORWARD OF LOSSES against speculative business income of that year. Such loss can be carried forward for a maximum of four assessment years i.e., upto A.Y.2028-29, in this case, as specified under section 73(4). Loss from specified business 20,000 Loss from specified business under section 35AD can be set-off only against profits of any other specified business. If loss cannot be so set-off, the same has to be carried forward to the subsequent year for set off against income from specified business, if any, in that year. As per section 73A(2), such loss can be carried forward indefinitely for set-off against profits of any specified business. Mr. Aditya is entitled to deduction u/s 35AD, since he has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). He can, accordingly, carry forward loss from such business indefinitely for set off against profits of any other specified business. Loss from the activity of owning and maintaining race horses 2,000 Losses from the activity of owning and maintaining race horses (current year or brought forward) can be set-off only against income from the activity of owning and maintaining race horses. If it cannot be so set-off, it has to be carried forward to the next year for set-off against income from the activity of owning and maintaining race horses, if any, in that year. It can be carried forward for a maximum of four assessment years, i.e., upto A.Y.2026-27, in this case, as specified under section 74A(3). 6. Computation of Gross Total Income of Mr. Garg for the A.Y. 2024-25 Particulars ` ` (i) Income from salary 15,000 (ii) Profits and gains of business or profession 66,000 Less: Unabsorbed depreciation brought forward from A.Y.2023-24 (Unabsorbed depreciation can be set-off against any head of income other than “salary”) 11,000 55,000 (iii) Capital gains Long-term capital gain on sale of land 10,800 © The Institute of Chartered Accountants of India  5.38 INCOME TAX LAW Less: Brought forward short-term capital loss [Short- term capital loss can be set-off against both short-term capital gains and long-term capital gains as per section 74(1)] 9,800 1,000 Gross Total Income 71,000 Amount of loss to be carried forward to A.Y.2025-26 Particulars ` (1) Loss from speculative business [to be carried forward 22,000 as per section 73] [Loss from a speculative business can be set off only against income from another speculative business. Since there is no income from speculative business in the current year, the entire loss of ` 22,000 brought forward from A.Y.2023-24 has to be carried forward to A.Y. 2025-26 for set-off against speculative business income of that year. It may be noted that speculative business loss can be carried forward for a maximum of four years as per section 73(4), i.e., upto A.Y.2027-28] (2) Loss on maintenance of race horses [to be carried 15,000 forward as per section 74A] [As per section 74A(3), the loss incurred in the activity of owning and maintaining race horses in any assessment year cannot be set-off against income from any other source other than the activity of owning and maintaining race horses. Such loss can be carried forward for a maximum of four assessment years i.e., upto A.Y.2028-29] (3) Loss from gambling can neither be set-off nor be carried forward. © The Institute of Chartered Accountants of India AGGREGATION OF INCOME, SET-OFF AND CARRY 5.39 FORWARD OF LOSSES 7. Computation of total income of Mr. Srivatsan for the A.Y.2024-25 Particulars ` ` Salaries Income from salaries 2,20,000 Less: Loss from house property since Mr. Srivatsan has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A) 1,90,000 30,000 Profits and gains of business or profession Income from speculation business 30,000 Less: Loss from cloth business of ` 2,40,000 set off to the extent of ` 30,000 30,000 Nil Capital gains Long-term capital gains from sale of urban land 2,50,000 Less: Set-off of balance loss of ` 2,10,000 from cloth business 2,10,000 40,000 Income from other sources Income from betting 45,000 Gross Total Income 1,15,000 Less: Deduction under section 80C (life insurance premium paid) [See Note (iv) below] 30,000 Total income 85,000 Losses to be carried forward: Particulars ` (1) Loss from cloth business (` 2,40,000 – ` 30,000 – ` 2,10,000) Nil (2) Loss from specified business covered by section 35AD 20,000 Notes: (i) Loss from specified business covered by section 35AD can be set-off only against profits and gains of any other specified business. Therefore, such loss cannot be set off against any other income. The unabsorbed loss has to be carried forward for set-off against profits and gains of any specified business in the following year. Mr. Srivatsan © The Institute of Chartered Accountants of India  5.40 INCOME TAX LAW is entitled to deduction u/s 35AD, since he has exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). Therefore, he can carry forward loss of ` 20,000 from specified business referred u/s 35AD indefinitely for set off against profits of any specified business. (ii) Business loss cannot be set off against salary income. However, the balance business loss of ` 2,10,000 (` 2,40,000 – ` 30,000 set-off against income from speculation business) can be set-off against long-term capital gains of ` 2,50,000 from sale of urban land. Consequently, the taxable long-term capital gains would be ` 40,000. (iii) Loss from card games can neither be set off against any other income, nor can be carried forward. (iv) For providing deduction under Chapter VI-A, gross total income has to be reduced by the amount of long-term capital gains and casual income. Therefore, the deduction under section 80C in respect of life insurance premium of ` 45,000 paid has to be restricted to ` 30,000 [i.e., Gross Total Income of ` 1,15,000 – ` 40,000 (LTCG) – ` 45,000 (Casual income)]. Mr. Srivatsan is entitled to deduction u/s 80C, since he has exercised the option of shifting out of the