479. Whether, where in respect of an assessment year, there is income under a head, the loss, if any, under any other head for that assessment year should first be set-off against it before the carried forward losses under the former head can be set-off against such income
Circular No. 587 was issued by the Central Board of Direct Taxes on 11 December 1990. Its subject is 479. Whether, where in respect of an assessment year, there is income under a head, the loss, if any, under any other head for that assessment year should first be set-off against it before the carried forward losses under the former head can be set-off against such income.
Fixes the order of set-off: section 71 comes before section 72 and section 74. Where in an assessment year there is income under one head and a loss under another, the current year's loss under the other head must first be set off against that income under section 71, before brought forward losses under the former head are set off against it. The Board says it is so advised in consultation with the Ministry of Law. The position is subject to the exceptions in Chapter VI barring inter-head adjustment of certain losses, such as speculation loss and loss from owning and maintaining race horses. It notes that return Form No. 1, notified on 21 November 1990, reflects this view, while Form No. 2 and Form No. 3, notified on 26 April 1990, were built on the opposite view that brought forward losses are set off under the respective heads first; the method in Form No. 1 is to hold good for all assessees.
The question whether section 71 takes precedence over sections 72 and 74 had been raised, and was considered in consultation with the Ministry of Law.
479. Whether, where in respect of an assessment year, there is income under a head, the loss, if any, under any other head for that assessment year should first be set-off against it before the carried forward losses under the former head can be set-off against such income
1. The question whether the provisions of section 71 of the Income-tax Act, providing for set-off of loss from one head against income from another in an assessment year, take precedence over the provisions of section 72 (carry forward and set-off of business losses) and section 74 (carry forward and set-off of losses under the head ‘Capital gains’ has been considered in consultation with Ministry of Law.
2. The Board are advised that effect has first to be given to the provisions of section 71, i.e., where in respect of an assessment year, there is income under a head, the loss, if any, under any other head for that assessment year should first be set-off against it before the carried forward losses under the former head can be set-off against such income. This position is, however, subject to the exceptions provided in Chapter VI of the Income-tax Act which prohibit inter-head adjustments with regard to certain losses, such as speculation loss or the loss incurred in the activity of owning and maintaining race horses.
3. The view contained in paragraph 2 is reflected in the income-tax return Form No. 1 (for companies other than those claiming exemption under section 11 of the Income-tax Act) notified on 21st November, 1990. However, the format of the income-tax return Form No. 2 (for assessees, other than companies and those claiming exemption under section 11, whose total income includes "Profits and gains of business or profession") and income-tax return Form No. 3 (for assessees, other than companies and those deriving income from property held for charitable and religious purposes claiming exemption under section 11, whose total income does not include "Profits and gains of business or profession"), notified on 26-4-1990, was based on the view that carry forward losses have to be set-off in the succeeding assessment years under the respective heads of income before giving effect to the provisions of section 71. In view of the opinion now given by the Ministry of Law, the method of computation of income incorporated in Form No. 1 would hold good for all the assessees.Circular : No. 587, dated 11-12-1990.
In an assessment or rectification where the loss determined to be carried forward differs from the figure claimed in the return.
A company has income under one head of Rs. 10 lakh in the year, a current year loss under another head of Rs. 4 lakh, and brought forward business loss of Rs. 10 lakh. Section 71 is applied first, so the Rs. 4 lakh reduces the income to Rs. 6 lakh; only Rs. 6 lakh of the brought forward loss is then absorbed, leaving Rs. 4 lakh to be carried forward. On the contrary sequence the whole Rs. 10 lakh of brought forward loss would have been used up and the Rs. 4 lakh current loss carried forward instead.
Forms it names. Form No. 1, Form No. 2, Form No. 3
Source: the Income Tax Department’s own published text — its page for this instrument.
