Question 5 OR (b)

Inter-head set off of losses under section 71 (as set, 1961 Act, AY 2019-20)

3 marks

Time to write: About 6 minutes

From an older CBCS paper

Question

Question 5 OR (b) · 3 marks

Explain the provisions relating to inter head adjustments, that is, the set off of losses under the head house property, under business and profession and under income from other sources. (Section 71) (3)

Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2019-20 (previous year 2018-19), with the dates as printed.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

6 minfor 3 marks

Read from the question

Section 71The section is named: open with what it says, then explain or apply it.

Write it in this order

1 Intra-head first and the rule of section 71 1 mark 2 min
2 House property loss, with the limit 1 mark 2 min
3 Business and other sources losses 1 mark 2 min

123

Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Set off within a head first

A loss from one source is first set off against income from another source under the same head (section 70). Section 71 then deals with the net loss of a head, allowing it to be set off against income under other heads of the same assessment year. Whatever cannot be so set off is carried forward under the section for that head.

Picture itInter-head set off of losses under section 71 (as set, 1961 Act, AY 2019-20)

1The toy shop's loss sinks quietly into the sweet shop's profit—business against business first.

Intra-head set offA loss from one business against the profit of another business

2What remains crosses over: the house file absorbs the business loss.

Inter-head set offA loss under any head other than capital gains that remains after intra-head set off is set off against income under any other head

3Only the locked tray stands apart—a capital loss leaves every other tray alone.

Capital gainsA loss under Capital gains cannot be set off against income under any other head

The rule of section 71

A net loss under any head except Capital gains may be set off against income under any other head of the same year (section 71(1)).
Where the assessee also has income under Capital gains, the loss may be set off against that income too, short-term or long-term (section 71(2)).
A loss under Capital gains itself cannot be set off against any other head (section 71(3)).

House property loss

It may be set off against income under any head, including Salaries, Business or profession and Capital gains.
From assessment year 2018-19 only ₹2,00,000 of it may be set off against other heads in a year (section 71(3A), inserted with effect from 1 April 2018 as its footnote shows).
The part not set off is carried forward for up to eight assessment years, for set off only against house property income (section 71B).

Business or profession loss

It may be set off against income under House property, Capital gains and Other sources, but not against Salaries (section 71(2A)).
Its unabsorbed part is carried forward under section 72. A speculation loss, though, can be set off only against the profits of a speculation business (section 73).

Loss under income from other sources

It may be set off against income under any other head (section 71(1)). A loss from owning and maintaining race horses, though, can be set off only against income from that activity (section 74A(3)).

Example (our own figures)

For assessment year 2019-20 an individual has salary of ₹6,00,000, a house property loss of ₹2,40,000, a business loss of ₹50,000 and interest income of ₹30,000. The house property loss is set off against salary up to ₹2,00,000; the other ₹40,000 is carried forward under section 71B. The business loss cannot touch the salary, so it is set off against the interest of ₹30,000, and ₹20,000 is carried forward under section 72. Gross total income: ₹4,00,000.

Where the 3 marks sit

#	Component	Marks
1	Intra-head first and the rule of section 71	1
2	House property loss, with the ₹2,00,000 limit	1
3	Business and other sources losses	1
	Total	3

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