Set-off and carry forward of house property and capital gains losses, and clubbing of a spouse's remuneration from a concern in which the other spouse has a substantial interest (as set, 1961 Act, AY 2021-22)

Losses under the head Income from house property

1. Set-off within the head (section 70(1)): a loss from one house (for example a self-occupied house carrying interest on a housing loan) is set off first against the income from another house property of the same year.
2. Set-off against other heads (section 71(1), (2) and (3A)): the net loss of the head may be set off against income under any other head, salaries and capital gains included, but only up to ₹2,00,000 in the year. The excess cannot be set off in that year, however much other income there is.
3. Carry forward (section 71B): the part not set off is carried forward to the next eight assessment years and set off there only against income from house property.
4. No condition on the return: section 80 lists the losses that need a return filed in time to be carried forward (business, speculation, specified business, capital gains and the owning and maintaining of race horses); a loss under section 71B is not among them, so it is carried forward even when the return for the year of loss is filed late.
5. Under section 115BAC: a person who opts for the section cannot set off a house property loss against any other head (section 115BAC(2)(ii)(b), inserted by the Finance Act, 2020, section 53), and that loss is deemed to have been given full effect, so no further deduction for it is allowed in any later year (section 115BAC(3)). The option counts only if exercised in the prescribed manner: with the section 139(1) return by a person with no business or professional income, or on or before the section 139(1) due date by one who has such income (section 115BAC(5)). A business taxpayer's option, once exercised, applies to the later assessment years too; it may be withdrawn only once, for a previous year other than the one in which it was exercised, and after that he can never exercise it again unless he ceases to have business or professional income, when the option for other income becomes available (proviso to section 115BAC(5)).

Example (our own figures): house property loss ₹3,50,000 and salary ₹9,00,000: ₹2,00,000 is set off against the salary, and ₹1,50,000 goes forward, to be set off only against house property income of the next eight years.

Losses under the head Capital gains

1. Short-term capital loss (section 70(2)): set off against any capital gain of the year, short-term or long-term.
2. Long-term capital loss (section 70(3)): set off only against long-term capital gains; never against a short-term gain.
3. No set-off against other heads (section 71(3)): a loss under the head Capital gains can never be set off against salary, business, house property or other sources.
4. Carry forward (section 74(1)): the loss not set off is carried forward for eight assessment years (section 74(2)). A brought forward short-term loss is set off against short-term or long-term gains; a brought forward long-term loss only against long-term gains.
5. Return in time: the loss is carried forward only if determined on a return filed within the time allowed by section 139(3), that is by the due date under section 139(1) (section 80).

Example (our own figures): short-term capital loss ₹80,000 and long-term capital gain ₹50,000 in the year: ₹50,000 of the loss is set off against the gain and ₹30,000 is carried forward. Had the loss been long-term and the gain short-term, nothing could be set off.

Conditions common to both

• Each loss can be carried forward for not more than eight assessment years after the year in which it was first computed (sections 71B and 74(2)).
• A loss carried forward is set off in a later year only against income of the same head (and, for capital gains, of the permitted kind), never against other heads.

Clubbing: remuneration of a spouse

Section 64(1)(ii) includes in an individual's total income any salary, commission, fees or other remuneration, in cash or in kind, that the individual's spouse receives from a concern in which the individual has a substantial interest.

1. Substantial interest (Explanation 2 to section 64(1)): in a company, owning beneficially, alone or with relatives, shares (other than those carrying a fixed dividend) with at least 20% of the voting power at any time in the previous year; in any other concern, being entitled to at least 20% of its profits.
2. Exception (proviso to section 64(1)(ii)): the clause does not apply where the spouse holds a technical or professional qualification and the remuneration comes solely from applying that technical or professional knowledge and experience. Both limbs must be met: the qualification itself, and income that comes solely from applying that knowledge and experience. Remuneration out of line with the spouse's qualification and experience is evidence that the second limb fails; it is not the statutory test in itself.
3. Both spouses with a substantial interest (Explanation 1 to section 64(1)): where each has a substantial interest and each receives remuneration, both remunerations are included with the spouse whose total income, before the clubbing, is greater; once included with one spouse, it stays there in later years unless the Assessing Officer, after giving that spouse an opportunity of being heard, decides otherwise.

Applied to Mr. X

• Mrs. X holds 30% of the share capital of B Ltd., more than 20%, so she has a substantial interest in B Ltd. (taking the shares as ordinary voting shares).
• Mr. X is employed by B Ltd. His remuneration is not in accordance with his educational qualification and experience, so, whatever qualification he holds, it is not shown to be solely attributable to the application of technical or professional knowledge and experience: the second limb of the proviso fails, and the proviso does not save it.
• So Mr. X's salary from B Ltd. is included in Mrs. X's total income under section 64(1)(ii), not in his own.
• Mrs. X's own salary from B Ltd. stays in her own income: it would be clubbed with Mr. X only if he too had a substantial interest in B Ltd., which the question does not say. If both had one, both salaries would be clubbed with the spouse with the greater other income (Explanation 1).