Question 5 OR (a)
Short note: set off and carry forward of business losses (as set, 1961 Act, AY 2016-17)
5.5 marks
- Time to write
- About 11 minutes
From an older CBCS paper
Question
Question 5 OR (a) · 5.5 marksWrite short notes on each of the following:
- Set off and carry forward or business losses
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2016-17 (previous year 2015-16), with the dates as printed. No marks are printed; 5.5 inferred (the two notes make the Or side of a question of 11 marks; both are to be written). "Set off and carry forward or business losses" stands as printed (the Hindi twin has "set off and carry forward of business losses").
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
Read from the question
- 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 and across heads (sections 70, 71) 1½ marks 3 min
- 2 Carry forward under section 72 1½ marks 2 min
- 3 Speculation, specified business and depreciation 1½ marks 2 min
- 4 Return of loss and illustration 1 mark 2 min
- Check: every ask answered, key terms underlined 1 min
Short on time? Trim steps 1–3 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.
A business loss (a loss computed under the head for business or profession income) is dealt with first in the year it arises (set off) and then, if any part remains, in later years (carry forward). The paper prints carry forward or business losses; the note is read as of business losses, as the Hindi version has it.
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
- Within the head (section 70(1)): a loss from one business is first set off against the income of another business or profession of the same year.
- Against other heads (section 71(1) and (2)): any balance may be set off against income under any other head, including capital gains, except salary: section 71(2A) bars setting off a business loss against income under the head Salaries.
Carry forward of business losses
A loss not absorbed in the year (other than a speculation loss) is carried forward under section 72(1):
- it can be set off in a later year only against business or profession income, not against any other head;
- the business in which the loss arose need not still be carried on in the later year (section 72(1)(i) speaks of the profits of any business or profession carried on by him);
- it can be carried forward for at most eight assessment years after the year in which it was first computed (section 72(3)).
Speculation and specified business losses
- A loss from a speculation business can be set off only against the profits of another speculation business, in the same year or later (section 73(1) and (2)), and for not more than four assessment years (section 73(4)).
- A loss of a specified business referred to in section 35AD can be set off only against the profits of another specified business, and may be carried forward with no time limit (section 73A).
Depreciation not absorbed because profits were too small is carried forward under section 32(2) and added to the next year's depreciation, with no limit of years. In the order of set off, the business loss brought forward is set off first and the unabsorbed depreciation after it (section 72(2)).
A business or speculation loss is carried forward only if it has been determined on a return filed within the time allowed by section 139(3) (section 80). The set off in the year of the loss itself does not depend on this.
Illustration (our own figures)
| Previous year | Business result | Other income | Treatment |
|---|---|---|---|
| 2014-15 | Loss ₹3,00,000 | Salary ₹4,00,000; house property ₹1,00,000 | ₹1,00,000 set off against house property; not against salary; ₹2,00,000 carried forward |
| 2015-16 | Profit ₹1,50,000 | Salary ₹4,20,000 | ₹1,50,000 of the loss set off against the business profit; ₹50,000 carried forward |
Where the 5.5 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Set off within and across heads (sections 70, 71) | 1.5 |
| 2 | Carry forward under section 72 | 1.5 |
| 3 | Speculation, specified business and depreciation | 1.5 |
| 4 | Return of loss and illustration | 1 |
| Total | 5.5 |
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