Question 5 (a)

Short note: set-off and carry forward of losses under the head Capital Gains (as set, 1961 Act, AY 2022-23)

5.5 marks

Time to write: About 11 minutes

From an older CBCS paper

Question

Question 5 (a) · 5.5 marks

Write short notes on any two of the topics given below:

Set-off and carry forward of losses under the head of Capital Gain.

Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2022-23 (previous year 2021-22), with the dates as printed. No marks are printed for this part; 5.5 inferred (two of four notes carry 11 marks).

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

11 minfor 5½ marks

Read from the question

any twoThe paper asks for any 2, and this is one of them. Only 2 are marked: a third earns nothing.
short notesA note opens with the meaning, then two or three key points. No long introduction.

Write it in this order

Read; underline the asks; jot your points 1 min
1 Set-off within the head: short-term and long-term losses 2 marks 3 min
2 No set-off against other heads 1 mark 2 min
3 Carry forward for eight years; return in time 1½ marks 2 min
4 Example 1 mark 2 min
Check: every ask answered, key terms underlined 1 min

1234

Short on time? Trim steps 1 and 3 evenly rather than skip one: each is capped at its own marks. End with step 4 in a line or two.

Try it first. About 11 minutes for 5.5 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.

1. Set-off in the same year

Capital losses are first set off within the head Capital gains, but long-term and short-term losses are treated differently:

Picture itShort note: set-off and carry forward of losses under the head Capital Gains (as set, 1961 Act, AY 2022-23)

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

Short-term capital loss may be set off against any capital gain of the year, short-term or long-term (section 70(2)).
Long-term capital loss may be set off only against a long-term capital gain (section 70(3)); never against a short-term gain.
A long-term loss on listed equity shares, under the regime of section 112A, can be set off against other long-term gains like any other long-term loss.

2. No set-off against other heads

A net loss under the head Capital gains cannot be set off against income under any other head, such as salary, business or house property (section 71(3)). By contrast, a loss under another head (for example house property) may be set off against capital gains (section 71(2)), subject to the ₹2,00,000 limit for house property (section 71(3A)).

3. Carry forward

A capital loss not set off in the year is carried forward to the next assessment year and so on, for at most eight assessment years after the year in which it was first computed (section 74(1) and (2)).
In those later years the same rule applies: a short-term loss brought forward may be set off against any capital gain, a long-term loss only against long-term gains (section 74(1)(a) and (b)).
It can be carried forward only if the return for the year of the loss was filed by the due date under section 139(1) (section 80).
No capital loss arises on personal effects such as a car or furniture held for personal use, because they are not capital assets (section 2(14)(ii)); jewellery is kept out of personal effects, so it remains a capital asset.

4. Example

Example (our own): in 2021-22 Ms. Divya has a short-term gain of ₹40,000 on mutual fund units, a long-term loss of ₹90,000 on land and a short-term loss of ₹25,000 on shares. The short-term loss is set off against the short-term gain (₹15,000 remains taxable). The long-term loss cannot be set off against the short-term gain or her salary, so the whole ₹90,000 is carried forward, to be set off only against long-term gains up to the assessment year 2030-31.

Where the 5.5 marks sit

#	Component	Marks
1	Set-off within the head: short-term and long-term losses	2
2	No set-off against other heads	1
3	Carry forward for eight years; return in time	1.5
4	Example	1
	Total	5.5

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