Incurring Losses- Process of Setting off of losses, types of adjustment, unabsorbed depreciation and Exception for Setting off Losses are discussed below
Businesses are set up with a view to earn. The income is the most integral part & of course that is the driving force for all to start a business or a job. However, incurring loss in the process is also something that one cannot rule out. Losses occur to people with the truest of endeavors also. The principal of natural justice, on the contrary, provides set off for the losses incurred.
Types of Adjustment:
The Income tax law recognizes losses and provides adjustments for the same. Nevertheless there are some conditions to be fulfilled in order to rule out the possibilities of misuse of the opportunity.
- Intra-head Adjustment: If a loss incurred from a source under a particular head of income is being adjusted against the income acquired from the profit of another source under the same head of income, then it is called an intra-head adjustment
- Inter-head adjustment: Inter-head adjustment is the next step to intra-head adjustments. If the taxpayer incurs loss under one head and earns profit under another, then s/he can adjust the loss incurred under one head against the income of another head. For example, a loss under house property can be adjusted against the income from his/her salary
- Carry Forward: The loss incurred in this year can be carried forward to be adjusted in the next month if the losses remain unadjusted even after going through intra-head and inter-head adjustments
In case of unabsorbed deprecation, there is no restriction in the number of years. But the loss has to be set off against any head of income other than the income from salary in the subsequent years.
To prevent misuse of the set off of losses incurred laws, there are some exceptions paid down by the income tax department. Those are as follows:
- Setting off losses from speculation business against the profit earned from a non-speculation business is not permitted
- LTCL can be set off against LTCG only (STCG is not permitted)
- Losses cannot be set off and no expense can be claimed against casual income (racing, lotteries etc.)
- Losses incurred in the business of horse racing have to be set off against the income from horse racing only and no other head
Further the law provides that: ‘It is important to timely submit return of losses u/s 139(1) to avail benefit of set off losses. Thus any loss in respect of a)business or profession(non speculative) b) speculation business c) capital gains d) business of owning and maintain race horses shall not be eligible for set off, if return is not filed on the due date.’ It is, hence, rather advisable to consult an income tax lawyer to analyze the situation better.