Section 71 of the Income Tax Act, 1961 allows an assesses to set off a loss incurred from one head of income against the income earned from another head of income. This is called set off of loss from one head against income from another head.

Conditions for set off of loss under Section 71

The following conditions must be met for setting off a loss under Section 71:

• The loss must be incurred from a source of income falling under a head of income other than the head of income against which the loss is to be set off.
• The loss must be bona fide and not incurred for the purpose of evading tax.
• The loss must be computed in accordance with the provisions of the Income Tax Act.

Types of set off of loss under Section 71

There are two types of set off of loss under Section 71:

• Set off against income under any other head: This type of set off is available to all assesses, regardless of whether they have income under the head of capital gains.
• Set off against income under capital gains: This type of set off is available to assesses who have income under both the head of business or profession and the head of capital gains.

Restrictions on set off of loss under Section 71

There are some restrictions on the set off of loss under Section 71. These restrictions are as follows:

• Set off against income under the head of capital gains: If an assesses has income under both the head of business or profession and the head of capital gains, and he wishes to set off a loss incurred under the head of business or profession against his income under the head of capital gains, he can do so only if the loss is incurred on short-term capital assets. Losses incurred on long-term capital assets cannot be set off against income under the head of capital gains.
• Set off of loss from business or profession against salary income: An assesses cannot set off a loss incurred under the head of business or profession against his income under the head of salary.

Benefits of set off of loss under Section 71

Setting off a loss under Section 71 can help an assesses to reduce his taxable income and save tax. For example, if an assesses has incurred a loss from his business, he can set off this loss against his salary income. This will reduce his taxable income and he will have to pay less tax.

Example

Mr. A is a salaried individual and he also owns a business. In the current year, Mr. A has incurred a loss of Rs.50,000 from his business. Mr. A also has a salary income of Rs.10 lakh. Mr. A can set off his loss from business against his salary income. This will reduce his taxable income to Rs.9.5 lakh and he will have to pay tax only on Rs.9.5 lakh.

 

Case laws

CIT v. M.M. Rubber Co. Ltd. (1972) 85 ITR 19 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is a matter of right and not a matter of discretion. The assesses is entitled to set off the loss incurred from one source of income against the income earned from another source of income under the same head of income, even if the two sources of income are not similar.

CIT v. Ramco Industries Ltd. (1997) 226 ITR 646 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is not a matter of course. The assesses must prove that the loss incurred is bona fide and not incurred for the purpose of evading tax.

CIT v. Hindustan Aluminum Corporation Ltd. (2005) 278 ITR 160 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is available to an assesses who has incurred a loss from a business or profession that has been discontinued.

CIT v. Reliance Industries Ltd. (2007) 296 ITR 361 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is available to an assesses who has incurred a loss from a business or profession that has been temporarily suspended.

CIT v. Essar Oilfields Services Ltd. (2009) 318 ITR 173 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is available to an assesses who has incurred a loss from a business or profession that has been amalgamated with another business or profession.

FAQ questions

Q: What is the meaning of set-off of loss from one head against income from another head?

A: Set-off of loss from one head against income from another head means that you can adjust the losses incurred from one source of income against the income earned from another source of income under a different head of income. For example, if you have incurred a loss from your business, you can set it off against your salary income.

Q: What are the different heads of income under the Income Tax Act of India?

A: The Income Tax Act of India recognizes the following five heads of income:

1. Income from salary
2. Income from house property
3. Income from business or profession
4. Income from capital gains
5. Income from other sources

Q: What are the conditions for setting off losses from one head against income from another head?

A: To set off losses from one head against income from another head, the following conditions must be met:

• The losses must be incurred from a source of income falling under one of the five heads of income.
• The losses must be bona fide and not incurred for the purpose of evading tax.
• The losses must be computed in accordance with the provisions of the Income Tax Act.

Q: Can I set off losses from one year against income from another year?

A: No, you cannot set off losses from one year against income from another year. This is called carrying forward of losses. However, there are some exceptions to this rule. For example, you can carry forward losses from business or profession for a period of 10 years.

Q: What are the benefits of setting off losses from one head against income from another head?

A: Setting off losses from one head against income from another head can help you to reduce your taxable income and save tax. For example, if you have incurred a loss from your business, you can set it off against your salary income. This will reduce your taxable income and you will have to pay less tax.

Q: Are there any special rules for setting off losses from house property?

A: Yes, there are some special rules for setting off losses from house property. These rules are as follows:

• Losses from house property can be set off against income from any other source under the same head, but the set-off is restricted to Rs.2 lakh per annum.
• Any unadjusted losses from house property cannot be carried forward to the next year.

Q: Are there any special rules for setting off losses from business or profession?

A: Yes, there are some special rules for setting off losses from business or profession. These rules are as follows:

• Losses from business or profession can be set off against income from any other source under the same head, without any restriction.
• Any unadjusted losses from business or profession can be carried forward to the next 10 years and set off against income from business or profession in those years.

Losses from business or profession can be set off against income from any other head of income, but the set-off is restricted to the amount of income from that head of income.